JUDGMENT
Joginder Pall, A.M.
1. By this order we shall dispose of these two appeals filed by the Revenue against two orders of CIT(A), Chandigarh for asst. yrs. 1994-95 and 1995-96 as the issue involved in both the appeals is common.
2. The only effective issue raised in both the appeals is that the CIT(A) was not justified in cancelling the penalty amounting to Rs. 1,03,822 and Rs. 4,34,648 imposed by the AO under Section 271(1)(c) for asst. yrs. 1994-95 and 1995-96 respectively. The facts of the case are that the assessee had filed the return of income for asst. yr. 1994-95 declaring therein income of Rs. 1,41,300. The IT Department had carried out search and seizure action under Section 132(1) at the business premises of the assessee and residential premises of the partners. During the course of such action, unaccounted stock and other incriminating material and documents were found and seized. Such seizure also included documents mentioned in items A-10 and A-11 in the shape of loose bundles. The same indicated that the assessee had made purchases aggregating to Rs. 20,35,500 outside the books of accounts. Out of these, purchases to the extent of Rs. 19,06,788 related to asst. yr, 1995-96 and purchases to the tune of Rs. 1,31,742 related to asst. yr. 1994-95. When the assessee was confronted with these facts, the assessee admitted that it had made purchases outside the regular books of accounts. The facts on record further show that for asst. yrs. 1995-96 the value of stock which should have been available with the assessee worked out to Rs. 33,87,099. But the stock available with the assessee, as per books, was of the value of Rs. 55,24,858. Thus, stock was found deficient by Rs. 20.00 lakhs. The position of availability of stock was worked out by taking into account the unaccounted purchases. When the assessee was confronted with these facts, the assessee disclosed income of Rs. 28.00 lakhs under Section 132(4) in the hands of the firm.
2.1 As regards unaccounted purchases of Rs. 1,31,742 for asst. yr. 1994-95, Shri Vinod Kumar, partner admitted that these purchases were unaccounted, for which he disclosed an income of Rs. 1,50,000 in his individual capacity for asst. yr. 1994-95. The relevant extract of Shri Vinod Kumar’s statement as reproduced at p. 3 of the assessment order is as under:
“Those transactions are mostly unaccounted for peak amount of which will work out to Rs. 1,50,000 which is also hereby surrendered.”
It appears that the income of Rs. 1,50,000 was duly reflected in the return of Shri Vinod Kumar and assessed as such. But while completing the assessment for asst. yr. 1994-95 in the case of the partnership firm, the AO held that these transactions actually belonged to the partnership firm. Since these were unaccounted purchases, entire addition of the same amount was again made in the hands of the partnership firm. Though the additions of the same amount were made at both places yet these additions were accepted by Shri Vinod Kumar and the assessee. No appeals were filed against the orders of the AO.
3. In addition to above, the AO also referred to pp. 10, 11, 12 and 25 of item No. 11 found at the residence of the assessee which were in the form of loose papers. It appears from para 4 of the assessment order that rate difference and cash commission at 1 per cent from seller was mentioned therein. The assessee was asked to explain. It was submitted that no such commission and rate difference was earned on the transactions mentioned in these papers. In fact, it is clear from para 3 of assessment order for asst. yr. 1995-96 that the assessee had submitted that till asst. yr. 1994-95, there was no such commission and rate difference earned by the assessee. It was only in the asst. yr. 1995-96 that the assessee had earned commission income of Rs. 2,81,281 which was duly accounted for in the books of accounts of the assessee. However, the AO was not satisfied with the explanation of the assessee that it had not earned any such commission of rate difference in the Asst. yr. 1994-95 and accordingly an addition of Rs. 50,000 was made. The same was also accepted by the assessee and no appeal was filed.
3.1 At the time of completing assessment for asst. yr. 1994-95, the AO also initiated penalty proceedings under Section 271(1)(c) in respect of two additions of Rs. 1,31,742 being unaccounted purchases and Rs. 50,000 being undisclosed commission income. Since the assessee did not furnish any reply to the show cause notice, the AO imposed a penalty of Rs. 1,03,822.
4. Aggrieved, the assessee impugned the penalty in appeal before the CIT(A). It was submitted before the CIT(A) that Shri Vinod Kumar, partner bad also owned transactions of purchases of Rs. 1,31,742 and had disclosed income of Rs. 1,50,000 in his hands. Therefore, there was no justification for imposing the penalty in respect of the same income under Section 271(1)(c) irrespective of the fact that addition was also made in the hands of the firm and the assessee had not filed any appeal against the said order. As regards addition of Rs. 50,000, the assessee had submitted that addition made by the AO was totally uncalled for as the assessee had not earned any such income in assessment year under reference. The assessee had accepted the addition merely to buy peace but there was no justification for imposing the penalty. The CIT(A) accepted the submissions of the assessee in regard to addition of Rs. 50,000 that no specific charge of concealment was made out. As regards addition of Rs. 1,31,742 the CIT(A) accepted the submission of the assessee that the addition for the same amount having been made and accepted in the hands of Shri Vinod Kumar, no penalty could be imposed in respect of same addition made in the case of the firm. Relevant finding of the CIT(A) as recorded in paras 10, 11 and 13 of the impugned order are extracted below :
“10. As regards the penalty on the addition of Rs. 50,000 as per para. 4 also no specific concealment has been established at the stage of assessment in the course of the penalty proceedings.
11. At the time of search on 21st Oct., 1994, the relevant portion of the statement of Shri Vinod Aggarwal is reproduced below :
Question : In bundle Nos. 10 & 11 i.e., documents seized, I am showing you the various slips on which some transactions have been recorded. Please explain their accountability and nature.
Answer : These transactions are mostly unaccounted for the peak amount of which will work out to Rs. 1.5 lakhs, which is also hereby surrendered.
Question : I am explaining you the provisions of Section 132(4) read with Expln. 5 to Section 271(1)(c) of IT Act, 1961. Please state whether you want to avail of this opportunity.
Answer: Yes, I want to avail of this opportunity. Keeping in view all the facts of unaccounted transactions which are out of my undisclosed sources, I hereby in my individual capacity, make a surrender of Rs. 12.50 lakhs (Rupees twelve lakhs fifty thousand only) for asst. yr. 1994-95, the return for which is yet to be filed. This would cover all the transactions and investments questioned by you in my statement recorded.
12. The above would indicate that the assessee had made a surrender as regards bundle No. 10 & 11 in his individual capacity under Section 132(4). The peak of Rs. 1.5 lakhs was surrendered. Again the AO has made addition in para 3 and para 4 of his order on the basis of the same papers in the case of the assessee-firm. The surrender in the case of Shri Vinod Aggarwal in his individual capacity has been accepted and assessment framed under Section 143(3) on 3rd May, 1995. It is not legal to tax both the individual and the firm for the same transactions. Even if they do not dispute the addition so as to purchase peace, it does not follow that penalty for concealment can be imposed without brining material on file to show that the assessee-firm is guilty of concealment. The penalty is, therefore, deleted and the appeal succeeds.”
The Revenue is aggrieved by the order of CIT(A). Hence, this appeal before us.
5. Learned Departmental Representative for the Revenue, Shri D.P. Dhankar heavily relied on the assessment order. He drew our attention to para. 3 of assessment order where addition of Rs. 1,31,742 was made in the hands of the partnership firm based on documents seized during the course of search. He submitted that in this case the documents showing unaccounted purchases of Rs. 20,35,500 for asst. yr. 1994-95 were found and seized. Out of same, purchases to the tune of Rs. 1,31,742 related to the assessment year under reference and to the assessee. He submitted that income disclosed in the hands of Shri Vinod Kumar, partner, does not mean that no addition could have been made in the hands of the firm when the transactions related to the firm. Similarly he submitted that addition of Rs. 50,000 was made on the basis of documents seized during the course of search. He further submitted that the assessee has accepted the addition and no appeal has been filed. Therefore, the CIT(A) was not justified in cancelling the penalty.
6. Learned counsel for the assessee, on the other hand, heavily relied on the order of CIT(A). He also filed written submissions stating therein that mere fact that additions made by the AO have been accepted by the assessee, does not mean that penalty under Section 271(1)(c) could be imposed. He submitted that both the assessment proceedings and penalty proceedings are distinct and separate proceedings, Even if the additions have been accepted by the assessee, the issue of levy of penalty can still be agitated in appeals. He relied on the following judgments :
(i) V.P. Samtani v. CIT (1982) 135 ITR 313 (Cal);
(ii) Addl. CIT v. Nihal Chand Badri Lal (1982) 135 ITR 519 (MP);
(iii) CIT v. C.K. Naha & Bros. (1979) 117 ITR 19 (Cal);
(iv) CIT v. M. George & Bros. (1986) 160 ITR 511 (Ker);
(v) Addl. CIT v. Kejriwal Iron Stores (1987) 168 ITR 715 (Raj); and
(vi) CIT v. India Sea Foods (1996) 218 ITR 629 (Ker)(FB).
He further reiterated the submissions which were made before the authorities below :
7. We have heard both the parties at some length and carefully considered the rival submissions. We have examined the facts, evidence and material on record. We have also carefully gone through the orders of authorities below. From the facts discussed above, it is clear that the AO has imposed penalty in respect of two additions viz., a sum of Rs. 1,31,742 added on account of unrecorded purchases and Rs. 50,000 based on documents seized during the course of search. It is also true that Shri Vinod Kumar had disclosed an amount of Rs. 1,50,000 to cover the unrecorded transactions of purchases and included the same in his return of income filed for asst. yr. 1994-95. He did not file any appeal against the addition made in his hands. It is also true that same addition has been made in the hands of the partnership-firm and the assessee has also accepted the addition. Now the question to be decided by this Bench is whether penalty under Section 271(1)(c) can be imposed merely on the ground that additions have been made in the hands of the assessee and these have been accepted. It is trite law that both the assessment proceedings and penalty proceedings are distinct and separate. Reliance in this regard is placed on the judgment of Hon’ble Punjab & Haryana High Court (FB) in the case of Vishwakarma Inds. v. CIT (1982) 135 ITR 652 (P&H)(FB). Even if the addition has been made and upheld in appeal it does not mean that penalty can also be imposed under Section 271(1)(c). The requirement of imposing penalty under Section 271(1)(c) is materially different because for the purpose of levy of penalty under Section 271(1)(c), the Revenue is required to establish mala fide and dishonest motive on the part of the assessee. Now in this case, we find that the transactions of Rs. 1,31,742 relate to unaccounted purchases. If there are unaccounted purchases and sales outside regular books, only the resultant profit embedded therein can be added. In addition a possible reasonable amount of investment required in such unaccounted business is liable to be made. Thus, it is not the case where entire unaccounted purchases could be added as income of the assessee Reliance in this regard is placed on the following judgments :
(i) CIT v. Bhalla Bros. (1981) 10 LTR 45 (P&H);
(ii) ITAT Chandigarh Bench’s decision dt. 18th Aug., 1994, in the case of Goyal Mills Store, Patiala v. ITO in ITA Nos. 1342 & 1347/Chandi/88 for the asst. yr. 1984-85 (cross appeals);
(iii) ITAT, Pune Bench’s decision dt. 16th April, 1982, in the case of Bastimal Prakash Chandra & Co. v. ITO (1982) 74 TTJ (Pune) 150; and
(iv) ITAT, Jodhpur Bench’s decision dt. 21st July, 2000, in the case of TTO v. Naresh Fabrics (2002) 75 TTJ (Jd) 386.
In the recent judgment in the case of CIT v. President Industries (2002) 258 ITR 654 (Guj), Hon’ble Gujarat High Court has held that where unaccounted turnover in the form of undisclosed purchases and sales is found during search or survey it stands to reason that only income relatable to such turnover is required in be estimated. It is only such profits in the sales, that can be charged and not the entire sales proceeds. Thus, it was not correct to make addition of entire amount of Rs. 1,31,742, on this account. Only the resultant profit earned by such purchases were required to be added. In addition to the same, the AO could have estimated reasonable amount of investment required in making such purchases and an addition of the same amount could have also been made. Thus, the addition of the entire amount of Rs. 1,31,742 was not justified. Be that as it may, the assessee has not filed an appeal. Even if we consider that the amount of Rs. 1,31,742 also represented unexplained investment then also there is no justification for making any addition in the hands of the firm for the reason that Shri Vinod Kumar, partner has, himself disclosed an amount of Rs. 1,50,000 on this account. The partner can always make investment in the firm. Therefore, such unexplained investment would be covered by the income disclosed and assessed in the hands of Shri Vinod Kumar. In the light of these facts and legal position discussed above we do not find any justification to interfere with the order of CIT(A) in cancelling the penalty in respect of such addition.
7.1 Next part of the addition is Rs. 50,000 based on document No. 11. Here also the AO has hot made any specific charge against the assessee. It is not at all mentioned–whether these transactions related to assessment year. under reference or not. In fact, the discussion in the assessment order for asst yr. 1995-96 clearly shows that the assessee denied having earned such income in the asst. yr. 1994-95. The assessee had submitted that such income was earned only in the asst. yr. 1995-96 and the same was duly accounted for in the return where commission of Rs. 2,81,261 was shown in the books. There is absolutely no material on record is show that the assessee had, in fact, earned such income for assessment year under reference. In fact, there does not appear to be such source of income in the assessment year under reference. Thus onus was on the Revenue to show that the assessee had in fact, earned such income in the assessment year under reference and such income was not reflected in the return of income. Even during the course of hearing before us. learned Departmental Representative for the Revenue did not place any material on record to show that this was indeed income of the assessee for the assessment year under reference. Merely because the addition was made and accepted, does not mean that the penalty under Section 271(1)(c) can also be imposed. We confirm the order of CIT(A) on this count as well. Thus the appeal filed by the Revenue for asst. yr. 1994-95 is dismissed.
8. As regards asst. yr. 1995-96, the AO had considered two items of additions for the purpose of levy of penalty under Section 271(1)(c), the first addition of Rs. 34,736 being unexplained cash found during the course of search. The second addition of Rs. 7.50 lakhs is made on account of unexplained investment in the plot, This amount of Rs. 7.50 lakhs was also disclosed under Section 132(4) of IT Act, 1961. Here, also the AO imposed the penalty of Rs. 4,34,648 under Section 271(1)(c) for the reason that the additions made were accepted by the assessee and no reply to the show cause notice was furnished.
9. Being aggrieved, the assessee impugned the penalty in appeal before the CIT(A). It was submitted before the CIT(A) that as per satisfaction recorded in the assessment order the AO had initiated penalty proceedings only in respect of unexplained cash of Rs. 34,736. The AO had not initiated penalty proceedings in respect of any of the other additions. Therefore, no penalty under Section 271(1)(c) in respect of addition of Rs. 7.50 lakhs could be levied. As regards discrepancy in cash, the assessee had explained that the balances in the account books were not properly struck. It was explained that the difference had arisen on account of human error because the balance was wrongly taken as per books on 19th Oct., 1994. The search was conducted on 21st Oct., 1994, which was Friday. There were transactions on 21st Oct., 1994 and these would have effect on the cash in hand on 21st Oct., 1994 because 20th Oct., 1994, was a working day. On the basis of documents, it was submitted that the difference was only of Rs. 1,607. This amount being petty, should have been ignored. Accepting the contentions of the assessee, CIT(A) held that no penalty in respect of item of income for which satisfaction was not recorded in the assessment order, can be imposed. Besides, the difference in cash found at the time of search and as recorded in the cash book, stood fully reconciled. Therefore, the CIT(A) cancelled the penalty by recording following finding in paras 3, 4 & 5 of the impugned order :
“3. I have carefully examined the facts and circumstances of this case. In my opinion a penalty can only be imposed if the AO initiates the penalty proceedings in the course of the assessment proceedings. In the case of the assessee the relevant portion of the assessment order is as follows :
“Assessed, issue requisite documents. Charge int. under Section 234B & 234C. Penalty proceedings under Section 271(1)(c) have been initiated separately in respect of Para No. 1 of this order :”
Accordingly the penalty was only imposable as regards the addition made in Para No. 1 of the order i.e., an addition of Rs. 2,34,736 on account of discrepancy in cash found at the time of search and cash as per books.
4. The relevant portion of statement recorded on 21st Oct., 1994 is as follows :
“Question : During the course of search, an amount of Rs. 8,46,935 has been found. Please explain the source of this amount.
Answer ; About Rs. 2,50 lakhs is as per balances of the cash books of our three concerns stated earlier. Istri Dhan amounting to Rs. 45,000 belongs to the three ladies namely, Smt. Santosh Kumari, Nisha & Veena. The remaining amount of Rs. Five lakhs fifty thousand only (5.50 lakhs only) is hereby surrendered being unaccounted for income of the three concerns. The details of which would be given by me shortly.”
5. The cash on 21st Oct., 1984, has to be cash as per completed books on the basis of entries and business transacted after writing books on 19th Oct., 1994, and time of search on 21st Oct., 1994. The cash as per books is Rs. 2,50,348 as discussed above. The cash in hand sought to be explained on the basis of the balances in the cash book is Rs. 2.5 lacs. There is, therefore, no discrepancy. Penalty is accordingly deleted and the appeal is allowed.”
10. Leaned Departmental Representative for the Revenue relied on the order of AO. However, he was fair enough to concede that the difference in the cash found and as per books stood fully reconciled. He further submitted that the AO had initiated penalty proceedings under Section 271(1)(c) only in respect of addition of Rs. 34,736 and not in respect of any other addition. He further, submitted that the addition of Rs. 7.50 lakhs for which the AO had imposed the penalty, was covered by the income surrendered under Section 132(4) of IT Act.
11. Learned counsel for the assessee, on the other hand, heavily relied on the order of CIT(A).
12. We have heard both the parties and carefully considered the rival submissions w.r.t. facts, evidence and material on record. From the facts discussed above, it is obvious that at the time of completing assessment for the assessment year under reference, the AO had intimated penalty proceedings under Section 271(1)(c) only in respect of an addition of Rs. 34,736. This is clear from para 3 of impugned order extracted above. The AO had not initiated penalty proceedings under Section 271(1)(c) in respect of addition of Rs. 7.50 lakhs. Recording of satisfaction in the assessment order is the pre-requisite for initiation of penalty proceedings under Section 271(1)(c). Reliance in this case is placed on the judgment of Hon’ble Supreme Court in the case of DM. Manasvi v. CIT (1972) 86 ITR 557 (SC). Such justification is also required to be recorded in the course of assessment proceedings and the same constitutes the basis and foundations of the proceedings for levy of penalty. Reliance is also placed on two judgments of Hon’ble Delhi High Court in the cases of CIT v. Ram Commercial Enterprises Ltd. (2000) 248 ITR 568 (Del) and Dewan Enterprises v. CIT & Ors. (2000) 246 ITR 571 (Del). Thus, no penalty in respect of addition of Rs. 7.50 lakhs is exigible for the reasons that the AO had not recorded his satisfaction for concealment of income during the course of assessment proceedings. Even otherwise, we find that the assessee has disclosed such income under Section 132(4) during the course of search and seizure action. Accordingly the case is also covered under Expln. 5 to Section 271(1)(c). Therefore, the CIT(A) was justified in cancelling the penalty in respect of income of Rs. 7.50 lakhs.
13. As regards addition of Rs. 34,736 being unexplained cash, the assessee has been able to explain the difference. Learned Departmental Representative for the Revenue has not been able to place any material on record to controvert the finding recorded by the CIT(A). Therefore, even if the addition made was accepted by the assessee no penalty under Section 271(1)(c) is leviable in respect of the same. Thus, we are of the considered opinion that the CIT(A) was justified in cancelling the penalty for the assessment year under reference. We confirm his order and dismiss all the grounds of appeal.
14. In the result, appeals filed by the Revenue for both the assessment years are dismissed.