ORDER
T. V. K. NATARAJA CHANDRAN, A.M. :
These appeals by the Revenue are consolidated and disposed of by a common order for the sake of convenience as they relate to the same assessee and arise out of the similar facts and circumstances of the case and the contention of the parties are also same. These appeals pertain to penalties levied under S. 271(1)(c) for the asst. yrs. 1977-78, 1978-79, 1979-80 and 1980-81 and arise out of the appellate orders of AAC for the asst. yrs. 1977-78 and 1978-79 and CIT(A) for the asst. yrs. 1979-80 and 1980-81 respectively. The ITO levied penalties under S. 271(1)(c) for concealment of income as a consequence of the reassessment proceedings completed for these years as a result of search conducted in the residence and business permises of the partners of the firm on 23rd Jan., 1981. During the search the ITO found kachha and pacca sets of accounts maintained by the assessee for these years and which according to the ITO revealed substantial concealment of income. During the course of scrutiny there was settlement effected by the CIT for these years according to which the income was determined at Rs. 53,890, 95,253, 1,25,262 and 1,12,583 respectively for the asst. yrs. 1977-78 to 1980-81. At this juncture it is necessary to mention that prior to reassessment proceedings the original assessments were completed on a total income of Rs. 13,185, Rs. 35,390, Rs. 48,958 and Rs. 47,583. After finalising the reassessment the ITO initiated penalty proceedings and after observing the due process of law and considering the objection raised by the assessee he rejected the explanation offered by the assessee as unsatisfactory and levied penalties for concealment of income as detailed in the penalty orders. In short the case of the ITO was that the kachha and pacca books of accounts seized at the time of search revealed substantial concealment of income and there was great discrepancy found in these two sets of accounts. The assessee also agreed to the total income determined by the CIT at the time of settlement.
2. On appeal the AAC passed a speaking order for the asst. yr. 1977-78 and this has been applied for the asst. yr. 1978-79 cancelling the penalties imposed by the ITO for the asst. yrs. 1977-78 and 1978-79. According to him the addition in the reassessment was made by a settlement by treating some expenses which were not supported by vouchers. The expenses related to payments made to producers. The CIT has allowed deduction of Rs. 5,000 only for probable expenses incurred by the assessee for procuring the films for exhibition. The AAC pointed out that the ITO has not established that the assessee obtained films without making payment in excess of Rs. 5,000. He has also pointed out that the ITO had not taken into account the details or particulars of films and prints purchased by the applicant so that the rough estimation of the case could be arrived at nor the ITO has cited example of market purchase cost of 16 mm film to arrive at the average market rate in this regard. He has also pointed out that the fact that the assessee purchased films for the purpose of exhibition could not be disputed and the deduction of Rs. 5,000 allowed in the settlement was only a guess estimate and the reassessment was also based on such guess estimate only. He has made a pertinent observation that the addition made in the reassessment could not be said to represent separate, distinct and deliberate concealed income of the assessee. The plea raised by the assessee, according to the AAC was probable that the addition did not represent concealed income. Relying on the various judgments cited by the assessee before him and for the reasons given by him he cancelled the penalties levied by the ITO for the asst. yrs. 1977-78 and 1978-79. As regards the asst. yrs. 1979-80 and 1980-81 the CIT(A) passed a consolidated order for both the years. He pointed out that the ITO has not made any addition of positive income which has not been disclosed by the assessee other than the expenses claimed which were disallowed for want of supporting evidence. Therefore, according to him it is a case of allowance of estimated expenditure and not positive case of concealment of income by collecting positive evidence in support of the same. He made a pertinent observation that the expenses allowed to the assessee were not even 5% of the total income estimated in the settlement. Therefore, the CIT(A) concluded that there was nothing on record to prove that such addition represented concealed income of the appellant and there was wilful negligence or attempt on the part of the assessee to conceal the income. According to the CIT(A) the addition made in the reassessment was obviously not on account of deliberate concealment but on account of inability of assessee to produce accounts actually incurred and, therefore, it was necessary for the ITO to have brought some positive evidence to prove that there was deliberate concealment on the part of the assessee and the assessee was in possession of or had some source of concealed income. Since the ITO failed to do so the penalty imposed by him were not justified. Therefore, he cancelled the penalties levied for asst. yrs. 1979-80 and 1980-81.
3. At the time of hearing the learned Departmental Representative filed a copy of the settlement effected by the CIT(Inv.) Gujarat, Ahmedabad, as seen from the order-sheet extract dt. 29th June, 1983. In fact the AAC has reproduced the settlement in his appellate order. However, it is necessary to again mention certain salient features of the settlement order passed by the CIT which has bearing or live nexus with the issue of concealment of income. The CIT has mentioned as follows :
“The main point of dispute was regarding the payment made to producers which were not supported by evidence. Admittedly some expenditure is there but in the absence of details it cannot be accepted.”
Therefore, it is clear that the issue before the CIT was evidence for the payments made to producers from whom the assessee has purchased 16 mm films for exhibition not in commercial theatres but in schools, clubs, etc. At the time of hearing, the learned Departmental Representative put up a valiant defence of the orders passed by the ITO and the settlement order passed by the CIT and contended that the resultant income amounted to concealed income and, therefore, the penalties imposed by the ITO for these years were justified. The further defence taken by the learned Departmental Representative was that the assessee was unable to establish the claim of expenditure incurred for procuring the films and, therefore, the assessee has resorted to settlement before the CIT and he has also agreed to the determination of income.
4. The learned counsel for the assessee, on the other hand, reiterated the contentions raised before the first appellate authority and the CIT and also before the ITO in writing which were reproduced in the penalty orders. In short, the stand of the assessee was that there was no concealment of income in the kachha and pacca books maintained by the assessee and the assessee has only excluded the expenditure incurred for procurement of films from producers and also the corresponding receipts in the pacca books of accounts vis-a-vis the kachha accounts found at the time of search. It is only on account of inability to produce vouchers because the producers never give any vouchers for the films sold by them additional income was taken in reassessments. The assessees business was dwindled and ultimately closed down. Therefore, the assessee sought settlement to purchase peace and also agreed to the settlement made by the CIT. Therefore, the disallowance of expenditure incurred on the ground of inability to produce vouchers did not mean the addition represented a concealed income of the assessee and, therefore, he strongly supported the orders passed by the AAC and also the CIT(A).
5. At the time of hearing we had requested the learned Departmental Representative to produce the kachha and pacca books of accounts seized at the time of search so as to scrutinise whether there are any omission of receipts or inflation of expenses in the pacca books of accounts vis-a-vis the kachha books of accounts maintained by the assessee. The case was adjourned for two days so as to enable the Departmental Representative to produce the relevant books of accounts seized. When the matter came up for hearing the learned Departmental Representative was unable to produce books of accounts on the ground that there has been succession of officers and the books of accounts could not be located for production for perusal. Therefore, we proceed to dispose of the appeals on the basis of record and the submissions of the parties. We have again asked both the parties to confirm whether there were material differences between the kachha books and the pacca books including the receipts paid for general expenses and expenditure incurred for procuring films. Both the parties are informed that there were no differences.
6. After careful consideration of the record we came to the conclusion that there was no difference between the kachha books and the pacca books maintained by the assessee except to the extent of receipts being reduced in the pacca books which represented the expenditure incurred in procuring the 16 mm films for exhibition and general expenditure. Our conclusion is based on Sch. III furnished by the assessee before the CIT at the time of settlement in which the assessee has furnished year-wise particulars of receipts on one side and the corresponding expenditure towards general expenditure and procurement of films expenditure. In other words, the receipts and expenditure relating to cost of films procured were excluded from the pacca books vis-a-vis the kachha books. The assessee admitted other receipts and claimed other expenses including rent paid for hiring of films vis-a-vis procuring 16 mm films as outright purchases. Thus, if the receipts and expenses relating to cost of film procured is included in the pacca books there is hardly any difference between the kachha and pacca books. There is no iota of evidence brought on record other than the kachha and pacca books to show that the assessee had any positive income or the assessee has not furnished true and full particulars of source of income for the charge of concealment of income or furnishing inaccurate particulars of income. In short the settlement was made only on the basis there was no evidence for expenditure incurred for procuring films without which the assessee could not carry on its business. It is to be stated that the Assessing Officer did not ascertain the number of 16 mm films procured by the assessee for these years separately and the cost thereof so as to verify with the prevailing market rate or cost of such films. It is alleged that the producers do not, as a matter of fact, pass on vouchers for the film sold by them to the exhibitors and, therefore, it is impossible for the assessee to establish the cost of films procured by them from the producers. The procurement of films is essential for carrying on of the business of the assessee and the expenditure has been incurred in the course of a business as a businessman. The expenditure incurred by the assessee was mainly disbelieved because supporting vouchers were not produced, forgetting the reality of the fact that the producers do not pass on the vouchers for reasons best known to them. The difference between disallowance of expenditure on the ground of lack of vouchers stands on different footing compared to omission of a source of income or furnishing inaccurate particulars of income. The difference between the original income assessed and the revised income assessed in the reassessment arose not on account of furnishing of inaccurate particulars of income or concealment of income but inability to establish the claim of expenditure incurred for procuring the films, without which obviously the assessee could not have earned so much of profits. It is obvious that in case of exhibitors the cost of films procured is allowed as a deduction at 100% in the year of acquisition of the films and specific rules are prescribed, therefor. In respect of feature films deduction of cost of production of feature film is allowed in accordance with r. 9A of the IT Rules to the producers. Rule 9B provides deduction in respect of expenditure on acquisition of distribution rights of feature films. Therefore, the statute itself allows the cost of production of films or acquisition of film in respect of producers and exhibitors. The expenditure involved in this case which has not been proved by the assessee actually represented the cost of the films procured by the assessee and in case the assessee was able to obtain the vouchers the assessee could have obtained deduction of 100% being the cost of the films as a matter of course. Even the settlement order passed by the CIT shows that admittedly some expenditure was there paid to producers but it was not supported by evidence. The assessees business was dwindling down and in order to purchase peace the assessee came forward for settlement with a view to get exemption from penalty, interest, etc. Unfortunately though the case was settled no immunity to penalty was granted and the matter was left open to the ITO. The authenticity of expenditure incurred as noted down in the kachha book maintained by the assessee cannot be doubted or disputed because the assessee would not have anticipated the search by the Department. Even after search the entries in the kachha books are relied upon by the assessee in support of the expenditure incurred for procurement of films. Thus after considering all the facts and circumstances of the case we are satisfied that there is no concealment of income in this case and whatever may be the reason which prompted the assessee to agree for the settlement there is no further material brought on record by the ITO to show that the additional income assessed in the reassessment actually represented the concealed income of the assessee or the assessee has furnished inaccurate particulars of income. The penalties have been levied by the ITO relying only on the materials contained in the relevant assessment orders and nothing more. In similar circumstances Courts have disapproved the levy of penalty on that score. On that basis the Supreme Court in the case of Anantharam Veerasinghaiah & Co. vs. CIT (1980) 123 ITR 457 (SC) in the head notes at page 458 (ITR) observed as follows :
“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.”
7. In the facts and circumstances we agree entirely with the findings, observations and the conclusions arrived at by the AAC and the CIT(A) for these years and the penalties cancelled by them are justified in law and in the facts and circumstances of the case. Explanation 1 to sec. 271(1) contains a deeming provision according to which amount added or disallowed in computing total income shall be deemed to represent the income in respect of which particulars have been concealed. No doubt the fact that the assessment order contains a finding that the disputed amount represents income constitutes good evidence in 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 explanation given by the assessee is insufficient without there being, in addition, cogent material or evidence from which the necessary conclusion attracting a penalty can be drawn. The Supreme Court in the case of CIT vs. Khoday Eswarsa & Sons (1972) 83 ITR 369 (SC) on page 376 (ITR) observed as follows :
“It is clear that the penalty proceedings being penal in character, the Department must establish that the receipt of the amount in dispute constitutes income of the assessee. Apart from the falsity of the explanation given by the assessee the Department must have before it before levying penalty cogent material or evidence from which it could be inferred that the assessee has consciously concealed the particulars of his income or had deliberately furnished inaccurate particulars in respect of the same and the disputed amount is a revenue receipt. No doubt the original assessment proceedings for computing the tax may be a good item of evidence in penalty proceedings but the penalty cannot be levied solely on the basis of the reasons given in the original order of assessment.”
The Rajasthan High Court in the case of CIT vs. Goswami Smt. Chandralata Bahuji (1980) 125 ITR 700 (Raj) as seen in the headnotes at 701 (ITR) has held that “in order to justify a levy of penalty, there had to be some materials or circumstances leading to the reasonable conclusion that the amount represents the assessees income”. The Madhya Pradesh High Court in the case of Bhagirath Prasad Bilgaiya vs. CIT (1983) 139 ITR 902 (MP) in the head notes at page 902 (ITR) observed as follows :
“Merely because the assessees explanation was rejected by the Department it would not necessarily give rise to an inference that the assessee had surreptitiously suppressed income. There will be material on record to prove the nature of the income and that it was taxable. The findings given in the assessment proceedings for determining or computing the tax are not conclusive as far as the penalty proceedings are concerned.”
The Allahabad High Court in the case of Banaras Textorium vs. CIT (1988) 169 ITR 782 (All) in the head notes at page 782 (ITR) observed as under :
“In the scheme of the Act, the proceedings of imposition of penalty, though emanating from proceedings of assessment, are essentially independent and a separate aspect of the proceedings which closely follow the assessment proceedings. Penalty proceedings are quasi-criminal. Findings given in assessment proceedings are certainly relevant and have probative value but such findings are material alone and may not justify the imposition of penalty in a given case because the considerations that arise in penalty proceedings are different from those that arise in penalty proceedings.”
The Supreme Court in the case of Sir Shadilal Sugar & General Mills Ltd. vs. CIT (1987) 168 ITR 705 (SC) considered similar facts in that case and observed at page 713 (ITR) of the judgment that from agreeing to additions, it does not follow that the amount agreed to be added was concealed income. There may be a hundred and one reasons for such admission.
8. From the aforesaid judgments it is clear that penalty cannot be levied solely on the basis of reason given in the order of assessment and there should be further materials to support the finding of concealment of income or furnishing of inaccurate particulars of income. It is obvious that the ITO has not brought on record any other material or given findings to establish the guilt or charge of concealment or furnishing of inaccurate particulars of income.
9. In case the penalties levied by the ITO were to be considered under Explanation to S. 271(1)(c) then the facts of the case clearly show that the ITO has merely rejected the explanation offered by the assessee. He has also not established that the explanation offered by the assessee was false. On the other hand the explanation offered by the assessee is bona fide and all the facts relating to explanation have been disclosed by the assessee. The settlement order passed by the Commissioner whether equitable or inequitable is binding on the assessee but that alone would not justify levy of penalty. The ITO could have cross-verified the expenditure incurred by the assessee with reference to the books of the seller of the films so as to establish inflation of expenditure and the falsity of explanation offered by the assessee. Therefore, even Explanation 1 is not applicable. We accordingly uphold the orders of the first appellate authority and sustain the orders cancelling the penalties for these years and reject the grounds taken by the Revenue.
10. In the result the appeals are dismissed.