PETITIONER: COMMISSIONER OF INCOME TAX, MADRAS Vs. RESPONDENT: M/S. KHODAY ESWARSA & SONS DATE OF JUDGMENT22/09/1971 BENCH: VAIDYIALINGAM, C.A. BENCH: VAIDYIALINGAM, C.A. REDDY, P. JAGANMOHAN CITATION: 1972 AIR 132 1972 SCR (1) 846 1971 SCC (3) 555 CITATOR INFO : RF 1973 SC 22 (14) RF 1980 SC1146 (6) F 1992 SC 591 (2) ACT: Income-tax Act (11 of 1922), s. 28 (1) (c) Levy of penalty- Reason, in assessment proceedings-Weight to be attached to. HEADNOTE: In income-tax proceedings to the taxable income shown by the respondent in its return two items among others were added on the basis that there were illicit sales of alcohol and that certain sales bad not been properly accounted 'for. Thereafter, the Income-tax Officer, Special Investigation Circle, issued notice that he proposed to levy a penalty under s. 28(1) (r) of the Income-tax Act, 1922, as the respondent had concealed particulars of its income and deliberately furnished inaccurate particulars. He rejected the explanation of the assessee and levied a penalty. In the order levying penalty the Income-tax Officer stated that the reasons for adding the disputed amounts in the total income of the assessee had been already discussed in the original order of assessment and that there was no need to repeat them. The Appellate Assistant Commissioner in appeal confirmed the penalty. His approach to the case was not different and was based upon a guess that because there were many contiguous dry areas the respondent would have surreptitiously sold alcohol. The Appellate Tribunal considered the circumstances under which the additions came to be made by the Department in the assessment proceedings, and the various points which were pressed before it and the Appellate Assistant Commissioner on behalf of the assessee, and held that though there might be certain doubtful transactions it could not be stated that assessee had made any deliberate attempt at concealment regarding its pharmaceutical section, and that, though there might be justification for making additions in the original assessment order those additions by themselves could not lead to the conclusion that the respondent had concealed its income or that it had furnished deliberately inaccurate particulars. On the basis of those findings the Appellate Tribunal set aside the order levying penalty. Thereafter, the Appellate Tribunal, holding that the reasons given by it for setting aside the penalty proceedings were all based on findings of fact and that no question of law arose out of those findings, rejected an application by the appellant for referring the question as to whether the Appellate Tribunal was right in cancelling the penalty. The appellant then filed an application under s. 66(2) of the Act but the High Court dismissed it on the same ground. Dismissing the appeal, HELD : 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 any explanation given by the assessee the Department must have before it, be-fore levying a penalty, cogent material or evidence from which it could he inferred that the assessee had consciously concealed the particulars of his income or had deliberately furnished inaccurate particulars. The original assessment proceeding for computing the tax is evidence in the penalty proceeding, but the penalty cannot be levied solely on the basis-'of the reasons given in the original assessment order. [853 B-D] 847 In the present case, except the reasons given in the original assessment order for including the disputed items in the total income, the Department had no other material or evidence from which it could be reasonably inferred that the assessee had consciously concealed particulars of his income or had deliberately furnished inaccurate particulars. The Appellate Tribunal made a correct and judicial approach in considering the question whether the penalty provisions were attracted as against the respondent. The conclusions drawn by the Appellate Tribunal were findings of fact recorded against the Department. Since on those findings of fact no question of law arose the High Court was justified in rejecting the application filed by the appellant under s. 66(2) of the Act. [852 B-E 853 E-F] Commissioner of Income-tax West Bengal-1 v. Anwar Ali, [1970] 76 I.T.R. 696, followed. JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 648 of 1967.
Appeal by special leave from the judgment and order dated
October 3, 1966 of the Mysore High Court in Civil Petition
No. 10 of 1966.
R. H. Dhebar and J. Ramamurthi, for the appellant.
The respondent did not appear.
The Judgment of the Court was delivered by
Vaidialingam, J. This appeal, by special leave, by the
Commissioner of Income-,tax, Madras, is against the judgment
and order dated October 3, 1966 of the High Court of Mysore,
rejecting the appellant’s application filed under s. 66(2)
of the Income-tax Act, 1922 (hereinafter to be referred as
the Act) for directing the Income–tax Appellate Tribunal,
Madras Bench to refer the question of law to the High Court.
The question of law, which the appellant wanted to be
referred was :
“Whether on the facts and in the circumstances
of the case the Appellate Tribunal was right.
in cancelling the penalty of Rs. 3 5,000
levied under section 2 8 ( 1 ) (c) of the
Indian Income-tax Act, 1922.”
The respondent was a firm carrying on business of manufac-
turing silk, carbon papers, type-writer ribbons, liquor,
spiriturous drugs and chemicals etc. In respect of the
assessment year 1955-56, the respondent had sent a return
showing Rs. 51,214 as taxable income. On looking into the
accounts and other records, the Income-,Lax Officer made
several additions to the amount shown in the return and
ultimately fixed the total assessable income in the sum of
Rs. 3,30,474. On appeal, the amount was reduced and the
taxable income was fixed in the sum of Rs. 2,09,575. In the
further appeal by the assessee to the Appellate Tribunal,
there
848
was no alteration in this figure. Only two items which were
added to tilt income and which have been accepted by all the
authorities required to be noticed. They are :
Pharmaceuticals, section-Rs. 77,518.00
Chemicals section-Rs. 9,900.00.
Relating to the pharmaceuticals section, it is the view of
the Income-tax Officer that some of the sale bills produced
by the respondent were found to be forged ones and some of
the purchasers of tincture were also fictitious persons.
There was no evidence produced by the assessee to show that
the Kolae powder, which was very essential for the
manufacture of tincture had been purchased by it. Hence the
Income-tax Officer drew an inference that the respondent had
not really manufactured tincture and that on the other hand
the firm must have sold all alcohol illicitly.
It was on this basis that the Income-tax Officer held that
the assessee must be considered to have omitted to show the
sum of Rs. 77,588. Similarly, regarding chemical section,
the Income-tax Officer found that the respondent has not
accounted for a part of sale of Ethyl Acetate and that on
verification it Was found that there has been a large
deficit of rectified spirit. On this basis the Income-tax
Officer drew an inference that the firm has again secreted a
large quantity of rectified spirit under the cloak of manu-
facture of chemicals. On the ground that certain sales had
not been properly accounted for, the sum of Rs. 9,900 was
added to the taxable income of the assessee. It was on the
above basis that the two items were included in ,,,he total
assessable income of the assessee firm.
These reasons given by the Income-tax Officer have been, by
and large, accepted by the Appellate Assistant Commissioner
and the Income-tax Appellate Tribunal. The Income-tax
Officer, Special Investigation Circle A, Bangalore issued a
notice under s. 28(1) to the respondent that it has
concealed the particulars of its income and deliberately
furnished inaccurate particulars in respect of the above
amounts added to the total income and that the Income-tax
Officer proposed to levy a penalty under S. 28 (1) (c) of
the Act. No doubt, in the notice certain other items, which
had already been added to the total income were also
referred to. But those items have been deleted from the
penalty proceedings by the Appellate Assistant Commissioner.
Therefore, we are only concerned with the two items,
referred to earlier.
The assessee sent a reply stating that it has not concealed
the particulars of ‘its income nor has it deliberately
furnished inaccurate particulars of such income. The
explanation offered by theassessee was not accepted by the
Income-tax Officer, and the latter
849
by his order dated February 15, 1963 imposed a penalty of
Rs. 35,000 on the ground that the respondent had concealed
the particulars of its income. That amount of penalty was
levied by the Income-tax Officer on the ground that over and
above the two items relating to the Pharmaceuticals and
Chemical sections, there has been a concealment of three
more items totalling Rs. 32,267. They were
Silk business; shortage in twisted silk yarn-Rs. 14,545.00
Shortage in Artificial silk Rs. 3,434.00
Carbons; Unaccounted consumption Rs. 14,288.00
It was on this basis that the total penalty was levied.
On appeal to the Appellate Assistant Commissioner, the
latter, no doubt deleted these three items totalling Rs.
32,267 from the penalty proceedings, but confirmed the order
of the Income-tax Officer regarding the two other items
holding that the omission by the assessee to include the
said two items amounted to the firm concealing particulars
regarding its income under s. 28(1) (c) of the Act. The
penalty amount levied by the Income-tax Officer was also
confirmed. Though the Appellate Assistant Commissioner
reduced the quantum of concealment-even assuming that there
has been a concealment-he did not make any reduction in the
penalty actually levied by the Income-tax Officer.
The assessee carried the matter in appeal before the Income-
tax Appellate Tribunal, Madras Bench. The main grievance
made by the assessee was that there has been no independent
consideration by the Income-tax Officer of the Appellate
Assistant Commissioner whether even on the basis that there
has been an omission by it to include certain items in its
return, such omission came within s. 28 (1) (c) of the Act,
so as to attract the levy of penalty. The assessee also
contended that both the Income-tax Officer and the Appellate
Assistant Commissioner have mainly relied on the reasons
given in the order of assessment for adding these two items
in the total income. According to the assessee there has
been no proper exercise of jurisdiction under s. 28 of the
Act.
The Income-tax Appellate Tribunal by its order dated Novem-
ber 13, 1964 set aside the order of the Income-tax Officer
as confirmed by the Appellate Assistant Commissioner levying
penalty on the respondent.
The Commissioner of Income-tax filed an application under s.
66(1) of the Act, requiring the Appellate Tribunal to draw
up
850
a statement of the case and refer the question extracted in
the earlier part of the judgment, to be referred to the High
Court. The Appellate Tribunal by its order dated June 7,
1965 rejected the Said application on the ground that the
reasons given by it for setting aside the penalty
proceedings were all based on findings of fact and that no
question of law arose out of those findings.
The appellant filed an application before the High Court of
Mysore, under s. 66(2) for directions being issued to the
Appellate Tribunal to, state the case and refer the question
of law,’ which the Appellate Tribunal has refused to refer.
A Division Bench of the High Court by its order dated
October 3, 1966 dismissed the appellant’s application on
,,he ground that the finding of the Appellate Tribunal that
the Income-tax Department had failed to prove that the
assessee had concealed its income or that it had
deliberately furnished inaccurate particulars of its income
are all on facts and that not question of law arises from
the order of the Appellate Tribunal.
Mr. Dhebar, learned counsel for the appellant, urged that
the order of the High Court is erroneous. According to him
the view of the High Court that the conclusions arrived at
by the Appellate Tribunal are all on facts and that no
question of law arises, is erroneous. The counsel urged
that there has been an omission by the respondent to include
in particular two items which are the subject of penalty
proceedings and the order of assessment in that regard has
become final. Hence it follows that this is a case where
the assessee has concealed the particulars of its income or
has deliberately furnished inaccurate particulars of its
income. Both the Income-tax Officer as well as the
Appellate Tribunal have in the penalty proceedings gone
elaborately into this aspect before levying penalty. The
approach made by the Appellate Tribunal when it set aside
the orders levying penalty is not justified in law.
Therefore, he urged that the High Court should have directed
the Appellate Tribunal to state a case and refer the
question of law as prayed for by the Appellant.
The respondent has not entered appearance before us. We
have been taken through the entire proceedings leading up to
the order levying penalty. We have also gone through the
reasons given by the Income-tax Officer for levying penalty
as well as the order of the Appellate Assistant Commissioner
confirming the same. We cannot accept the contention of Mr.
Dhebar that the Appellate Tribual has summarily interfered
with the orders levying penalty. We have gone through the
order of the Appellate Tribunal and we find that it has
considered the circumstances under which the additions came
to be made by the Department in the assessment proceedings
as well as the points that were pressed before it, on behalf
of the assessee as well as the Appelate Assistant
851
Commissioner. It is the view of the Appellate Tribunal that
theDepartment has not established that the assessee has not
manufactured tincture and that it had sold only alcohol.
This conclusion arrived at by the Income-tax Officer in the
penalty proceedings is, according-to the Appellate
Tribunal, purely one of conjecture or surmise. The
Appellate Tribunal, no doubt, was prepared to accept the
contention of the Department that there were a lot of
doubtful circumstances. Notwithstanding these circumstances
the Appellate Tribunal is of the view that when admittedly
there are Excise authorities in the premises of the
respondent, it is very difficult to hold that those officers
would have permitted tile assessee to utilise the alcohol
for other purposes. The Appellate Tribunal has also held
that even the sale bills produced by the respondent, contain
the proper per it numbers given by the Excise authorities
and that the Income-tax Department have not made any
inquiries from the Excise authorities whether those relevant
sales hive been made without their authorisation. The
Appellate rribunal has further held that there is no stock
discrepancy in Kola Liquidum if the transactions art–
considered as a whole for the entire period. Therefore,
regarding Pharmaceuticals section the Appellate Tribunal
finally held that though there may be certain doubtful
transactions, it cannot be stated that the, assessee has
made any deliberate attempt at concealment. Regarding the
Chemical section, the Appellate Tribunal is of the view that
though there may be justification for making additions in
the original assessment order to the amount shown in the
return, those additions by themselves cannot lead to the
conclusion that the respondent has concealed its income or
that it has furnished deliberately inaccurate particulars.
It was on the basis of these findings that the Appellate
Tribunal has set aside the order levying penalty.
One thing that strikes us when going through the order of
the Income-tax Officer levying penalty and the order of the
Appellate Assistant Commissioner confirming the said levy,
is that there is not much of an independent discussion
regarding the material question that has to be considered,
namely, whether the firm has concealed the particulars of
its income or whether it has deliberately furnished
inaccurate particulars of such income. On the other hand,
the Income-tax Officer after referring to the explanation
furnished by the assessee to the show cause notice, clearly
says that the facts relating to the unaccounted items have
been fully discussed already in the relevant assessment
orders for the concerned assessment year and that the
reasons given therein need not be repeated again. Then
there is only a very summary disposal of the plea raised by
the respondent that he has not concealed the particulars of
his income, nor has it deliberately furnished inaccurate
particulars,
852
of its income. The approach made by the Appellate Assistant
Commissioner is not far different from that of the Income-
tax Officer. In fact the Appellate Assistant Commissioner
makes a further guess that in view of the fact that there
were very many dry areas bordering Mysore, the respondent
would have surreptitiously sold alcohol that was supplied to
it without using it for the purpose of making tincture. It
is the view of the Appellate Assistant Commissioner that
the mere fact that there are Excise authorities to control
the activities, of persons like the assessee, is of no
material consequence. From what we have stated above, it is
clear that while there has been no proper approach made by
either the Income-tax Officer when he levied penalty or by
the Appellate Assistant Commissioner when he confirmed the
order levying penalty, the Appellate Tribunal, on the other
hand, has made a very correct and judicial approach in
considering the question whether the penalty provisions are
attracted as against the respondent. After a very fair and
full consideration of the material circumstances, the
Appellate Tribunal has set aside the order levying penalty.
As rightly pointed out by the High Court, the conclusions
drawn by the Appellate Tribunal are all on findings of fact
recorded against ,”-he Department. On those findings of
fact, there was no question of law arising for reference
being made to the High Court. Under those circumstances,
the High Court was perfectly justified in rejecting the
application filed by the appellant under s. 66(2) of the
Act.
Before we conclude we may refer to the decision of this
Court in Commissioner of Income-tax West Bengal I, and
Another v. Anwar Ali(1), wherein it has been held that one
of the principal objects in enacting s. 28 is to provide a
deterrent against recurrence of default on the part of the
assessee and that s. 28 is penal in the sense that its
consequences are intended to be effective deter-rent which
would put a stop to the practices which the legislature con-
siders to be against the public interest. It has been
further held that the Department must establish that the
receipt of the amount in dispute constitutes the income of
the assessee and if there is no evidence on record except
the explanation given by the assessee, which explanation has
been found to be false, it does not follow that the receipt
constitutes its taxable income. It has been further held
that as the proceedings under s. 28 are of a penal nature
and the burden is on the Department that a particular amount
is revenue receipt, it is legitimate to say that the mere
fact that the explanation of the assessee is false, does not
necessarily give rise to the inference that the disputed
amount represents the income. It has been pointed out in
the said decision that the finding given in the assessment
proceeding for determining or computing the tax is not
conclusive
[1970] 76 I.T.R. 696.
85 3
though it may be good evidence. It has been further held by
this, Court in the above decision :
“Before penalty can be imposed the entirety of
circumstances must reasonably point to the
conclusion that the disputed amount
represented income and that the assessee had
consciously concealed the particulars of his
income or had deliberately furnished
inaccurate particu- lars.”
From the above it is clear that 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, ‘he 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
that ,.the.- disputed amount is a revenue receipt. No doubt
the original assessment proceedings, for computing the tax
may be a good it,,, of evidence in the penalty proceedings;
but the penalty cannot be levied solely on the basis of the
reasons given’-in the original order of assessment.
In the case before us we have already pointed out that in
the order levying penalty the Income-tax Officer has
categorically stated that the reasons for adding the
disputed amounts in the total income of the assessee have
been already discussed in the original order of assessment
and that they need not be repeated again. The Appellate
Assistant Commissioner, we have already pointed out, has
made only a guess work. That clearly shows that except the
reasons given in the original assessment order for including
the disputed items in the total income, the Department had
no other material or evidence from which it could be
reasonably inferred that the assessee had consciously
concealed the particulars of his income or had deliberately’
furnished inaccurate particulars.
For all the reasons given above, it follows that there is no
merit in the appeal and it is accordingly dismissed. As the
respondent has not appeared, there will be no order as to
costs.
V.P.S. Appeal
dismissed.
854
