PETITIONER:
ANANTHARAM VEERASINGAIAH & CO.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX, A.P.
DATE OF JUDGMENT15/04/1980
BENCH:
PATHAK, R.S.
BENCH:
PATHAK, R.S.
UNTWALIA, N.L.
VENKATARAMIAH, E.S. (J)
CITATION:
1980 AIR 1146 1980 SCR (3) 618
ACT:
Income Tax Act, 1961, Section 271(1)(c), scope of
Penalty Proceedings in quasi judicial and Burden of proof is
on Revenue-Secret Profits or undisclosed income and their
actual availability for application by the assessee-Power of
the High Court in a Tax Reference case, explained.
HEADNOTE:
The appellant, assessee in an Abkari contractor. It
filed a return of its income for the assessment year 1959-
60, disclosing a total turnover of Rs. 10,92,132/- and an
income of Rs. 7,704/-. The Income Tax Officer did not accept
the correctness of the return. He found that on 12th
December, 1957 and 16th January, 1958 the excess of
expenditure over the disclosed available cash was Rs.
17,726/- and Rs. 65,066 respectively. He also noticed
several deposits, totalling Rs. 28,200, entered in the names
of certain Sendhi shopkeepers. The Income Tax Officer
rejected the account books of the assessee and his
explanations for the discrepancies thereof and estimated the
assessee's income on an overall figure of Rs. 5,00,018. In
appeal before the Appellate Assistant Commissioner and
thereafter before the Income Tax Appellate Tribunal the
assessee succeeded in getting the assessed income reduced to
Rs. 1,30,000 in addition to the books profits. Penalty
proceedings were taken against the assessee and the case was
referred to the Inspecting Assistant Commissioner, who
imposed a penalty of Rs. 75,000 under s. 271(1)(c) of the
Income Tax Act, 1961. On appeal by the assessee, the
Appellate Tribunal held that there was no positive material
to establish that the cash deposits represented concealed
income. In regard to the cash deficits, the Appellate
Tribunal noticed that for the assessment year 1957-58 an
addition of Rs. 2,00,000 had been made to the book profits,
and it observed that some part of that amount could have
been ploughed back into the business. It held that an amount
of Rs. 90,000 representing unledgerised cash credits of that
year could be said to have been introduced in that year.
Allowing the appeal, the Appellate Tribunal set aside the
penalty order made by the Inspecting Assistant Commissioner.
On a reference to the High Court, at the instance of
the Commissioner of Income Tax, the High Court held that the
Appellate Tribunal was not justified in holding that no
penalty was leviable. Hence the appeal by special leave.
Directing the Appellate Tribunal to take up the appeal
under section 260(1) of the Income Tax Act, the Court
^
HELD: An order imposing a penalty is the result of
quasi criminal proceedings. The burden of proof lies on the
Revenue to establish that the disputed amount represents
income and that the assessee has consciously concealed the
particulars of his income or has deliberately furnished
inaccurate particulars. It is for the Revenue to prove these
ingredients before a penalty can be imposed. [622B-C]
619
Since the burden of proof in a penalty proceeding
varies from that involved in an assessment proceedings a
finding in an assessment proceeding that a particular
receipt is income cannot automatically be adopted as a
finding to that effect in the penalty proceeding. In the
penalty proceeding the taxing authority is bound to consider
the matter afresh on the material before it and, in the
light of the burden to prove resting on the Revenue, to
ascertain whether a particular amount is a revenue receipt.
No doubt, the fact that the assessment order contained a
finding that the disputed amount represents income
constitutes good evidence in the penalty proceeding but the
finding in the assessment proceeding cannot be regarded as
conclusive for the purposes of the penalty proceeding.
Before a penalty can be imposed the entirety of the
circumstances must be taken into account and must point to
the conclusion that the disputed amount represents income
and that the assessee has consciously concealed particulars
of his income or deliberately furnished inaccurate
particulars. The mere falsity of the explanation given by
the assessee is insufficient without there being in addition
cogent material or evidence from which the necessary
conclusion attracting a penalty could be drawn. [622C-G]
Commissioner of Income Tax, West Bengal and Anr. v.
Anwar Ali [1970] 76 I.T.R. 696; Commissioner of Income Tax,
Madras v. Khoday Eswara and Sons, [1972] 83 I.T.R. 369;
applied.
2. When an 'intangible' addition is made to the book
profits during an assessment proceeding, it is on the basis
that the amount represented by that addition constitutes the
undisclosed income of the assessee. That income although
commonly described as 'intangible', is as much a part of his
real income as that disclosed by his account books. It has
the same concrete existence. It could be available to the
assessee as the book profits could be. [623A-B]
3. Secret profits or undisclosed income of an assessee
earned in an earlier assessment year may constitute a fund,
even though concealed, from which the assessee may draw
subsequently for meeting expenditure or introducing amounts
in his account books. Any part of that fund need not
necessarily be regarded as the source of unexplained
expenditure incurred or of cash credits recorded during a
subsequent assessment year. The mere availability of such a
fund cannot, in all cases, imply that the assessee has not
earned further secret profits during the relevant assessment
year It is a matter for consideration by the taxing
authority, in each case, whether the unexplained cash
deficits and the cash credits can be reasonably attributed
to a pre-existing fund of concealed profits or they are
reasonably explained by reference to concealed income earned
in that very year. In each case the true nature of the cash
deficit and the cash credit must be ascertained from an
overall consideration of the particular facts and
circumstances of the case. Evidence may exist to show that
reliance cannot be placed completely on the availability of
a previously earned undisclosed. income. A number of
circumstances of vital significance may point to the
conclusion that the cash deficit or cash credit cannot
reasonably be related to the amount covered by the
intangible addition but must be regarded as pointing to the
receipt of undisclosed income earned during the assessment
year under consideration. It is open to the Revenue to rely
on all the circumstances pointing to that conclusion. What
those several circumstances can be is difficult to enumerate
and indeed, from the nature of the enquiry, it is almost
impossible to do so. However, they must be such as can lead
to the firm conclusion that
620
the assessee has concealed the particulars of his income or
has deliberately furnished inaccurate particulars. [623C-H,
624A]
Lagadapti Subha Ramiah v. Commissioner of Income Tax,
Madras, [1956] 30 I.T.R. 593; S. Kuppuswami Mudaliar v.
Commissioner of Income Tax, Madras, [1964] 51 I.T.R. 757;
approved.
In an income tax reference, a High Court should confine
itself to deciding the question of law referred to it on
facts found by the Appellate Tribunal. It is the Appellate
Tribunal which has been entrusted with the authority to find
facts. [624D-E]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2592 of
1972.
Appeal by Special Leave from the Judgment and Order
dated 9-11-1971 of the Andhra Pradesh High Court in Case
Referred No. 4 of 1970.
S. T. Desai, T. A. Ramachandran, Mrs. J. Ramachandran
and M. N. Tandon for the Appellant.
S. C. Manchanda, Miss A. Subashini and D. B. Ahuja for
the Respondent.
The Judgment of the Court was delivered by
PATHAK, J. This appeal, by special leave, is directed
against a judgment of the Andhra Pradesh High Court,
concerning the scope of s. 271(1)(c) of the Income Tax Act,
1961.
The assessee is an Abkari contractor. It filed a return
of its income for the assessment year 1959-60, disclosing a
total turnover of Rs. 10,92,132 and an income of Rs. 7,704.
The Income Tax Officer did not accept the correctness of the
return. He found that on 12th December, 1957 and 16th
January 1958 the excess of expenditure over the disclosed
available cash as Rs. 17,720 and Rs. 650,66 respectively. He
also noticed several deposits, totaling Rs. 28,200, entered
in the names of certain Sendhi shop-keepers. The assesee’s
explanation that the excess expenditure was met from amounts
deposited with him by some shop-keepers but not entered in
his books was not accepted. The alternative explanation that
expenditure incurred earlier had possibly been recorded
later was also rejected. In regard to the cash deposits of
Rs. 28,200 the assessee explained that they represented
amounts deposited with it as security. That explanation was
rejected insofar as deposits totalling Rs. 21,000 were
concerned. The Income Tax Officer rejected the account books
of the assessee and estimated the assessee’s income on an
overall figure of Rs. 5,00,018. In appeal before the
Appellate Assistant Commissioner and thereafter before the
Income Tax
621
Appellate Tribunal, the assessee succeeded in getting the
assessed income reduced to Rs. 1,30,000 in addition to the
book profits. Penalty proceeding were taken against the
assessee and the case was referred to the Inspecting
Assistant Commissioner. The assessee reiterated the
explanation which it had offered in the assessment
proceedings. Predictably, the Inspecting Assistant
Commissioner rejected the explanation and held that the
items of cash deficit and cash deposits represented
concealed income resulting from the suppressed yield and low
selling rates mentioned in the books. He observed that the
assessee had concealed the particulars of his income and
furnished inaccurate of it, and therefore imposed a penalty
of Rs. 75,000 under s.271(1)(c) of the Income Tax Act, 1961.
On appeal by the assessee, the Appellate Tribunal held that
there was no positive material to establish that the cash
deposits represented concealed income. In regard to the cash
deficits, the Appellate Tribunal noticed that for the
assessment year 1957-58 an addition of Rs. 2,00,000 had been
made to the book profits and it observed that some part of
that amount could have been ploughed back into the business.
It held that an amount of Rs. 90,000 representing
unledgerised cash credits of that year could be said to have
been introduced in this year. Allowing the appeal, the
Appellate Tribunal set aside the penalty order made by the
Inspecting Assistant Commissioner.
At the instance of the Commissioner of Income Tax, the
following question was referred to the High Court:-
“Whether on the facts and in the circumstances of
the case, the Tribunal is justified in holding that no
penalty is leviable ?”
The High Court held that the Appellate Tribunal was not
justified in holding that no penalty was leviable.
In this appeal, it is urged by learned counsel for the
assessee that the High Court erred in interfering with a
finding of fact, that the penalty proceedings being quasi-
criminal the burden of proof lay on the Revenue to establish
that a penalty was attracted and that the intangible
addition of Rs. 2,00,000 represented real income and the
Appellate Tribunal was right in considering that an amount
of Rs. 90,000 was available to cover the cash deficits.
Section 271(1)(c) of the Income Tax Act, 1961
provides:-
“271(1). If the Income Tax Officer or the
Appellate Assistant Commissioner in the course of any
proceedings under this Act is satisfied that any
person-
(a) * * * *
622
(b) * * * *
(c) has concealed the particulars of his income
or deliberately furnished inaccurate
particulars of such income he may direct that
such person shall pay by way of penalty…
…………………”
This is the provision as it stood at the relevant time. It
is now settled law that an order imposing a penalty is the
result of quasi-criminal proceeding and that the burden lies
on the Revenue to establish that the disputed amount
represents income and that the assessee has consciously
concealed the particulars of his income or has deliberately
furnished inaccurate particulars. Commissioner of Income
Tax, West Bengal and Another v. Anwar Ali. It is for the
Revenue to prove those ingredients before a penalty can be
imposed. Since the burden of proof in a penalty proceeding
varies from that involved in an assessment proceeding, a
finding in an assessment proceeding that a particular
receipt is income cannot automatically be adopted as a
finding to that effect in the penalty proceeding. In the
penalty proceeding the taxing authority is bound to consider
the matter afresh on the material before it and, in the
light of the burden to prove resting on the Revenue, to
ascertain whether a particular amount is a revenue receipt.
No doubt, the fact that the assessment order contains a
finding that the disputed amount represents income
constitutes good evidence in the penalty proceeding but the
finding in the assessment proceeding cannot be regarded as
conclusive for the purposes of the penalty proceeding, That
is how the law has been understood by this Court in Anwar
Ali (supra), and we believed that to be the law still. It
was also laid down that before a penalty can be imposed the
entirety of the circumstances must be taken into account and
must point to the conclusion that the disputed amount
represents income and that the assessee has consciously
concealed particulars of his income or deliberately
furnished inaccurate particulars. The mere falsity of the
explanation given by the assessee, it was observed, was
insufficient without there being in addition cogent material
of evidence from which the necessary conclusion attracting a
penalty could be drawn. These principles were reiterated by
this Court in Commissioner of Income Tax, Madras v. Khoday
Eswarsa and sons.
In the present case, the Appellate Tribunal has relied
entirely on the basic that an intangible addition of Rs.
2,00,000 had been made to the book profits of the assessee
for the assessment year 1957-58
623
and it inferred that an amount of Rs. 90,000 was available
for being put to use in the year with which we are
concerned. Now it can hardly be denied that when an
“intangible” addition is made to the book profits during an
assessment proceeding, it is on the basis that the amount
represented by that addition constitutes the undisclosed
income of the assessee That income, although commonly
described as “intangible”, is as much a part of his real
income as that disclosed by his account books. It has the
same concrete existence. It could by available to the
assessee as the book profits could be. In Lagadapati Subha
Ramiah v. Commissioner of Income-tax, Madras the Andhra
Pradesh High Court adverted to this aspect of secret profits
and their actual availability for application by the
assessee. That view was affirmed by the Madras High Court in
S. Kuppuswami Mudliar v. Commissioner of Income-Tax, Madras.
There can be no escape from the proposition that the
secret profits or undisclosed income of an assessee earned
in an earlier assessment year may constitute a fund, even
though concealed, from which the assessee may draw
sufficient for meeting expenditure or introducing amounts in
his account books. But it is quite another thing to say that
any part of that fund must necessarily be regarded as the
source of unexplained expenditure incurred or of cash
credits regarded during a subsequent assessment year. The
mere availability of such a fund cannot, in all cases, imply
that the assessee has not earned further secret profits
during the relevant assessment year. Neither law nor human
experiences guarantees that an assessee who has been
dishonest in one assessment year is bound to be honest in a
subsequent assessment year. It is a matter for consideration
by the taxing authority in each case whether the unexplained
cash deficits and the cash credits can be reasonably
attributed to a pre-existing fund of concealed profits or
they are reasonably explained by reference to concealed
income earned in that very year. In each case the true
nature of the cash deficit and the cash credit must be
ascertained from an overall consideration of the particular
facts and circumstances of the case. Evidence may exist to
show that reliance cannot be placed completely on the
availability of a previously earned undisclosed income. A
number of circumstances of vital significance may point to
the conclusion that the cash deficit or cash credit cannot
reasonably be related to the amount covered by the
intangible addition but must be regarded as pointing to the
receipt of undisclosed income earned during the assessment
year under consideration. It is open to the Revenue to rely
on all the circumstances pointing to
624
that conclusion. What those several circumstances can be is
difficult to enumerate and indeed, from the nature of the
enquiry, it is almost impossible to do so. In the end, they
must be such as can lead to the firm conclusion that the
assessee has concealed the particulars of his income or has
deliberately furnished inaccurate particulars. It is
needless to reiterate that in a penalty proceeding the
burden remains on the Revenue of proving the existing of
material leading to that conclusion.
The Appellate Tribunal erred in law in confining itself
to the fact that an intangible addition had been added to
the assessee’s book profits two years before and that a part
of that amount remained available to the assessee
thereafter, the High Court is right in departing from that
limited approach and in insisting on a consideration of all
the relevant facts and circumstances of the case relied on
by the Revenue for purpose of determining whether the
Revenue has succeeded in discharging its burden.
But while considering the legal principles involved in
the application of s. 271(1)(c) the High Court, in our
opinion, has erred in entering into the facts of the case
and determining in point of fact that the assessee earned
income during the relevant previous year and that he was
guilty of concealing such income or furnishing inaccurate
particulars of it. Having found that the legal basis
underlying the order of the Appellate Tribunal was not
sustainable, the High Court should have limited itself to
answering the question raised by the reference in the
negative, leaving it to the Appellate Tribunal to take up
the appeal again and redetermine it in the light of the law
laid down by the High Court. It is the Appellate Tribunal
which has been entrusted with the authority to find facts. A
High Court is confined to deciding the question of law
referred to it on facts found by the Appellate Tribunal.
That is the kind of order we now propose to make.
Because the finding of the Appellate Tribunal that no
penalty leviable rests on an erroneous legal basis, we
endorse the opinion of the High Court that the question
referred must be answered in the negative. But as the High
Court should not have rendered findings of fact, we vacate
the finding of fact reached by the High Court, without
expressing any opinion on their correctness, leaving it to
the Appellate Tribunal in exercise of its duty under s.
260(1) of the Income Tax Act to take up the appeal and to
redetermine it conformably to this judgment and in the light
of the principle laid down in it.
The appeal is disposed of accordingly. There is no
order as to costs.
S.R. Case remitted to Tribunal.
625