M.R. Sharma, J. - (1.) M/s. Salig Ram Kanhaya Lal, Kotkapure, is a registered firm carrying on the business of commission agents in foodgrains. It is being described hereinafter as the assessee. During the accounting year ending March 31, 1965, the assessee has supplied some wheat to the District Food and Supplies Controller, Bhatinda, for which it received a sum of Rs. 2,72,281. In the balance-sheet for the period ending March 31, 1965, the assessee showed the cost of wheat as Rs. 2,80,911 and the amount received from the District Food and Supplies Controller was shown on the liabilities side under the account " District Food and Supplies Controller". Even though the assessee was maintaining accounts on the mercantile system of accounting, yet it did not claim any loss in the said transaction in the assessment year 1965-66. The assessee filed a civil suit in the Court of Senior Subordinate Judge, Bhatinda, claiming an extra amount of the Rs. 78,131: The suit was decreed for Rs. 78,131 on July 18, 1969, along with Rs. 4,159 as costs. The total decretal amount of Rs. 82,290 was entered by the assessee in its books of account as " suspense account (Government litigation) " during the accounting year 1970-71. This item was not entered in the books of account of the assessee during the accounting year 1969-70 relevant to the assessment year 1970-71. The assessee filed a return for the relevant assessment year on September 30, 1970, declaring its income at Rs. 46,250. The assessment was originally completed by the ITO on July 6, 1971, on a total income of Rs. 47,675. The revenue claims that the suspense account showing credit of Rs. 82,290 came to the notice of the ITO during the proceedings for the assessment year 1971-72 and, since this amount related to the earlier year, the ITO initiated proceedings under Section 147 of the I.T. Act, 1961 (hereinafter referred to as "the Act"), and issued a notice under Section 148 of the Act to the assessee on February 10, 1972. In response to this notice, the assessee filed a return reiterating its income to be Rs. 46,250 as had been shown in the earlier return. The assessee pleaded that, since the Government had filed an appeal against the judgment and decree of the learned senior sub-judge passed in its favour for Rs. 89,290, this amount was not liable to tax. The ITO did not accept this contention. He held that the assessee was maintaining its books of account on mercantile system of accounting and it became entitled to this amount when the decree was passed in its favour in July, 1969. He, therefore, treated this amount as revenue receipt and included it in the assessment completed on December 11, 1972, determining the total income at Rs. 1,29,865.
(2.) THE assessee challenged this order of assessment in an appeal before the AAC on the ground that, since the decree had been challenged in appeal, the judgment had not become final and the decretal amount was not liable to be taxed in the year when the decree was passed. This contention prevailed with the appellate authority, who allowed the appeal filed by the assessee. The ITO went in appeal before the Income-tax Appellate Tribunal, Chandigarh Bench, which was allowed. The Bench held that the taxability of an assessee's income was determined by the charging section which fully applied to t,he facts of the case. Under the mercantile system of accounting the taxability of the amount was not determined by the receipt of the amount and, under that system, the amount should have been credited in the books of account on accrual basis in the year when the decree was passed in favour of the assessee. At the instance of the assessee, the Income-tax Appellate Tribunal has referred the following question of law for our opinion : "Whether, on the facts and in the circumstances of the case, the Tribunal was right, in law, in holding that the sum of Rs. 82,290 was taxable as the assessee's income for the assessment year 1970-71 ?" This dispute is, the subject-matter of Income-tax Reference No. 11 of 1976. In proceedings under Section 148 of the Act, the ITO did not agree with the contention raised by the assessee and, vide his order dated December 11, 1972, he determined the total income of the assessee at Rs. 1,29,865 and reported the case to. the IAC, Bhatinda, who, in turn, imposed the penalty of Rs. 1,25,000, on the assessee on September 11, 1975.
(3.) THE assessee went in appeal against this order. THE Appellate Tribunal observed that the assessee had been showing the details of this transaction in its books of account right from the accounting year 1964-65, and even the expenses on civil suits were debited in the account books as and when incurred. While following the observations made in Regal THEatre v. CIT [1966] 59 ITR 449 (Punj), it came to the conclusion that the assessee did not indulge in any concealment of facts with the intention of evading any tax in respect of any gains. On this basis, it allowed the appeal filed by the assessee and waived the penalty. At the instance of the Commissioner, the Appellate Tribunal has, in Income-tax Reference No. 74 of 1977, referred the following questions of law to us for our opinion: " (i) Whether the Tribunal has been right in law in cancelling the penalty of Rs. 1,25,000? (ii) Whether the Tribunal has been right in law in holding that where the Explanation to section 271(1)(c) is applicable, only minimum penalty, as prescribed under section 271(1)(c), is imposable and when the conduct of the assessee was analysed the fiction of the Explanation could not be made to play any role against the assessee ?" Since the aforesaid two references, namely, Income-tax Reference No. 11 of 1976, and Income-tax Reference No. 74 of 1977, involve common questions of law and fact, they are being disposed of by one judgment. Now, from the point of view of a layman, the facts giving rise to the controversy are that the assessee was called upon by a department of the State Govt, to supply a particular quantity of wheat within a specific period. The department concerned did not lift the entire quantity of wheat during the stipulated period. The assessee was made to supply the balance quantity of wheat at a time when the prices of wheat had risen in the open market. It represented that it should be paid on the basis of the market value of the wheat which was supplied during the extended period. This representation was turned down and the assessee had to enter into litigation with the State Govt. to get its dues which were granted to it by the Senior Sub-Judge in a suit. Since the State Govt. had filed an appeal against the judgment of the Senior Subordinate Judge decreeing the claim of the assessee, it kept the receipts and expenditure relating to this transaction in a suspense account. For this default, it was burdened with the liability to pay additional tax on the basis of the fiction that it could be deemed to have received the amount on the date when the claim was originally decreed in its favour. Not only that, it was also burdened with a penalty of Rs. 1,25,000 because it did not mention the decretal amount in the return for the earlier period even though it had indicated the same in the balance-sheet which was produced before the I.T. authorities. Luckily for it, the Income-tax Appellate Tribunal waived the penalty but nevertheless it substantially increased its tax burden. ;