Dwarka Prasad, Actg. C.J. - (1.) THIS reference under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as " the Act"), has been made by the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, by its order dated November 7, 1974, and the following question of law arising out of the order of the Appellate Tribunal has been referred for the decision of this court: " Whether, on the facts and in the circumstances of the case, the Tribunal was justified in cancelling the penalty of Rs 16,250 levied by the Inspecting Assistant Commissioner under the Explanation to Section 271(1)(c) read with Section 274 of the Income-tax Act, 1961 ? " The facts giving rise to this reference may be shortly stated. M/s. Kejriwal Iron Stores, Neem-Ka-Thana, was a firm registered under Section 185 of the Act. The assessee filed its return for the assessment year 1970-71 and while examining the same and scrutinising the accounts of the assessee, the Income-tax Officer, Sikar, found that the assessee had made purchases from M/s. Amar Singh Bajaj & Sons, New Delhi, and made payments in cash for such purchases exceeding Rs. 2,500. The Income-tax Officer also found that there were discrepancies in the dates of payments and receipts between the purchaser and the seller. The Income-tax Officer, therefore, came to the conclusion that there were infringements of the provisions of Section 40A(3) of the Act and thus the total amount of Rs. 16,250 was disallowed and added back to the total income. The Income-tax Officer also made an addition of Rs. 5,092 to the total income of the assessee by estimating the income by sale on account of rejection of the account books and entries in the account books of the assessee. While passing the assessment order on December 26, 1970, the Income-tax Officer also directed that penalty notices under Sections 273 and 271(1)(c) of the Act may be issued to the assessee.
(2.) ON the initiation of penalty proceedings under Section 271(1)(c) of the Act, the assessee submitted his revision application and thereafter the Inspecting Assistant Commissioner of Income-tax, Bikaner Range, Bikaner, decided the penalty proceedings by his order dated January 29, 1973. The Inspecting Assistant Commissioner held that the assessee could not be held to have underestimated its income, nor was he found guilty of committing gross or wilful neglect so as to attract the trading addition of Rs. 5,092. However, as regards the addition of Rs. 16,250, the Inspecting Assistant Commissioner held that there was an infringement of the provisions of Section 40A(3) of the Act and that there was a substantial difference in the dates of payment shown by the assessee and the seller. It was observed that the assessee had not shown the withdrawals from cash balance in hand on the dates on which payments are alleged to have been made according to the seller and that the withdrawals were not supported by entries in the books of account of the assessee which showed that his books of account were unreliable and incorrect. It was, therefore, held that the addition of Rs. 16,250 was fully justified and called for imposition of penalty. The Inspecting Assistant Commissioner, therefore, imposed the minimum penalty of Rs. 16,250 upon the assessee by his order dated January 29, 1973. On further appeal, the Income-tax Appellate Tribunal by its order dated March 26, 1974, set aside the penalty imposed upon the assessee on the ground that it was not open to the Inspecting Assistant Commissioner of Income-tax to make out an altogether new case for the imposition of penalty upon the assessee. It was pointed out that the satisfaction of the Income-tax Officer was the relevant circumstance for initiating penalty proceedings and if penalty could not be imposed on the basis of the satisfaction of the Income-tax Officer, a new ground could not be made out by the Inspecting Assistant Commissioner of Income-tax for imposition of penalty. In this view of the matter, the Appellate Tribunal deleted the penalty imposed upon the assessee. It is not in dispute before us that no penalty is imposable for infringement of the provisions of Section 40A(3) of the Act. The argument of learned counsel for the Revenue before us was that the Inspecting Assistant Commissioner of Income-tax proceeded to impose penalty upon the assessee on the ground that the books of account were unreliable and incorrect and the addition of Rs. 16,250 was made on account of unexplained investment and not on account of the breach of the provisions of Section 40A(3). On the other hand, the argument of learned counsel for the assessee is that the penalty proceedings were initiated by the Income-tax Officer while passing the assessment order and the ground which prevailed with the Income-tax Officer at the time of initiation of penalty proceedings should prevail for imposition of penalty also and not the ground which was made out by the Inspecting Assistant Commissioner while imposing the penalty. On a careful reading of the order of the Income-tax Officer, we find that although he noticed that there were discrepancies in the dates of payment and receipts as disclosed by the assessee and the seller, yet the addition of Rs. 16,250 to the total income of the assessee was made by the Income-tax Officer only on account of infringement of the provisions of Section 40A(3) and the consequent disallowance of the said amount. While computing the total income of the assessee, the Income-tax Officer had added in the trading account a sum of Rs. 5,092 and the amount of Rs. 16,250 was disallowed under Section 40A(3) of the Act. Thus, so far as the amount of Rs. 16,250 was concerned, the only ground which appears to have prevailed with the Income-tax Officer was the violation of the provisions of Sub-section (3) of Section 40A and a valid notice under Section 271(1)(c) of the Act appears to have been issued on account of the furnishing of inadequate particulars of the income of the assessee on account of which an addition of Rs. 5,092 was made in the trading account. The Inspecting Assistant Commissioner held that the addition of Rs. 5,092 did not attract the imposition of penalty, but only as regards, the addition of Rs. 16,250 as unexplained expenditure. The Inspecting Assistant Commissioner went on to hold that there were discrepancies in in the dates of payments shown by the assessee in his account books and that given out by the sellers who were residing at Delhi and the Inspecting Assistant Commissioner held that because the books of account of the assessee were unreliable and incorrect, the assessee was showing the cash balances without corresponding withdrawals in respect of the amounts alleged to have been paid to the sellers on May 17, 1969, August 14, 1969, and August 30, 1969. Thus, according to the Inspecting Assistant Commissioner, the addition of Rs. 16,250 was made on account of unexplained investment by the assessee and that he was liable for imposition of penalty under Section 271(1)(c) of the Act. However, as observed earlier, the Income-tax Officer did not initiate the penalty proceedings against the assessee on account of the sum of Rs. 16,250 being added as unexplained investment which in accordance with the provisions of Section 69 would be deemed to be income of the assessee. Although the Income-tax Officer had noticed the discrepancies between, the dates of payments disclosed by the assessee and the dates of receipts disclosed by the seller, yet he left the matter there and proceeded to make the addition of Rs. 16,250 by disallowing the said amount under the provisions of Sub-section (3) of Section 40A. The Inspecting Assistant Commissioner could not make a new ground for imposition of penalty, inasmuch as the satisfaction for initiation of penalty proceedings has to be recorded by the Income-tax Officer and the basis for the satisfaction of the Income-tax Officer cannot subsequently be altered by the Inspecting Assistant Commissioner while proceeding to impose the penalty. In CIT v. Lakhdhir Lalji, 1972 85 ITR 77, it was observed by the Gujarat High Court that the penalty proceedings having been commenced against the assessee on a particular footing, the final conclusion for the levy of penalty could not be based on a different footing altogether. In that case, penalty proceedings were commenced on the ground of concealment of particulars of income while penalty was imposed on the ground that the assessee had furnished inadequate particulars of income. It was held that the assessee was not given a reasonable opportunity of being heard in the matter, if the imposition of penalty is based on a ground different from that on which the penalty proceedings were initiated. It was also pointed out that the Appellate Assistant Commissioner on hearing the appeal could commence penalty proceedings on a different ground, but if that was not done, and the ground on which the proceedings were commenced by the Income-tax Officer did not survive after the finding of the Appellate Assistant Commissioner, then the very basis of initiation of penalty proceedings against the assessee disappear and penalty could not be imposed upon the assessee.
(3.) APPLYING the principles laid down in the aforesaid case to the case on hand, it may be observed that the Income-tax Officer added the amount of Rs. 16,250 to the total income of the assessee only on the ground that such expenditure was disallowed on account of the provisions of Sub-section (3) of Section 40A, because the alleged payments were not made by crossed cheques or bank drafts and not on the ground that the assessee has not been able to disclose the source from which such payments were made. The Inspecting Assistant Commissioner of Income-tax held that it could not be said that any exceptional or unavoidable circumstances existed on account of which the assessee could not make payment in respect of the alleged purchases by crossed cheques or bank drafts. He proceeded to observe that the question regarding the addition of Rs. 16,250 did not end only with the application of the provisions of Section 40A(3), as there exists no other circumstance which warranted addition of Rs. 16,250. Then he proceeded to hold that the books of account of the assessee were completely unreliable as incorrect cash balances were shown, because withdrawals relatable to the payments shown to have been received by the sellers at Delhi have not been disclosed in the account books of the assessee. Thus, the Inspecting Assistant Commissioner was of the view that the addition of Rs. 16,250 to the total income of the assessee could be justified on two grounds, namely, the infringement of the provisions of Section 40A(3) of the Act and also on account of the fact that those transactions represented unexplained investments on the part of the assessee. It was open to the Inspecting Assistant Commissioner to initiate fresh penalty proceedings on the basis of the aforesaid conclusion arrived at by him in his penalty order dated February 11, 1972, but in the absence of initiation of any fresh proceedings, the Inspecting Assistant Commissioner of Income-tax could not modify the basis on which the Income-tax Officer proceeded to record his satisfaction for initiation of penalty proceedings. We, therefore, agree with the conclusion arrived at by the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, and hold that the Tribunal was justified in cancelling the penalty of Rs. 16,250 levied by the Inspecting Assistant Commissioner of Income-tax under the Explanation to Section 271(1)(c) of the Act upon the assessee. The reference is answered in the affirmative, in favour of the assessee and against the Revenue. The parties are left to bear their own costs. ;