ORDER
Pramod Kumar, A.M.
1. This appeal is directed against the order dt. 19th Jan., 1996 passed by the learned CIT(A)-V, Calcutta, in the matter of order under Section 271(1)(c) for the asst. yr. 1992-93. Revenue’s solitary ground of appeal is that on the facts and in the circumstances of the case, CIT(A) erred in cancelling the penalty imposed under Section 271(1)(c), amounting to Rs. 14,70,000.
2. The assessee is a share-broker. During the course of scrutiny proceedings, AO noticed that on 9th March, 1992, the assessee entered into a transaction for sale of 30,000 shares of ITC Ltd. and pursuant to this deal, which was duly entered in transaction register that is termed as ‘sauda book’, on 23rd March, 1992, the assessee had delivered these 30,000 shares to one M/s Jamunadas Bagri (JB) and full consideration, which was worked out at the rate of Rs. 770 per share, was duly received by the assessee on 24th March, 1992. The AO required the assessee to explain the availability of these 30,000 shares. While the source of 27,900 shares was readily explained as having been received from the stock exchange settlement and the AO was satisfied with this explanation, the trouble arose with regard to remaining 2,100 shares.
3. Vide letter dt. 25th March, 1995 (copy placed at pp. 1-3 of the paper book), the assessee submitted that 2,100 shares were originally purchased by the assessee on 18th June, 1991 at the rate of Rs. 159 and these very shares were sold on 30th July, 1991 at the rate of Rs. 240. It was explained that the distinctive numbers of these shares are the same as of those 2,100 shares which were included in the shares delivered to JB. The assessee further explained that though these shares were sold on 30th July, 1991, these shares found their way back to the assessee firm “through some broker/employee for sale and as the market was picking up, it was thought fit to hold the shares till the boom continues and the shares remained in our (assessee’s) office”. The assessee went to explain that “the said 2,100 shares were lying in office without any bill or correspondence which is very much routine in nature” and that the assessee is “not in a position to give any particulars/identity of the person to whom the said shares belonged”. It was in this background that the assessee finally surrendered the value of these shares as his additional income, vide para 10 of the letter which is reproduced below for ready reference :
“10. That as we are not in a position to identify the owner of the said 2,100 shares of ITC Ltd., we hereby voluntarily offer the value of the same as additional income for addition to our total income for asst. yr. 1992-93 for the sake of buying peace and to avoid hardship due to litigation etc., and to cooperate with the Department in finalisation of the assessment with a request to kindly take a lenient view regarding imposition of penalty/prosecution etc., as this offer is being made voluntarily and in good faith.”
4. The AO, however, was far from impressed by this generosity of, what the assessee has termed as, voluntary surrender of addition on account of value of these 2,100 shares.
5. In the assessment order under Section 143(3), as framed by the AO on 30th March, 1995, it was observed that the Sauda book did not contain any entries for purchase and sale of those 2,100 shares on 18th June, 1991 or 30th July, 1991. It was further noticed that the books of account did not indicate any evidence of anyone lodging those shares. The AO found it surprising that those shares worth more than Rs. 10,00,000 were kept without anyone bothering about the source of shares or identity of persons to whom these shares belonged. This casual explanation was found to be illogical and unbelievable. Accordingly, AO rejected the explanation as ‘unsubstantiated by both the facts and (the) circumstances’ and proceeded to make an addition of Rs. 14,70,000, being the value of 2,100 shares taken at the rate of Rs. 700 per share prevailing as at the time of preceding settlement i.e., as on 16th March, 1992, under Section 69 of the Act. This addition of Rs. 14,70,000 was not disputed by the assessee.
6. It was in the backdrop of these facts that penalty proceedings under Section 271(1)(c) were also initiated against the assessee.
7. During the course of penalty proceedings, assessee, apart from reiterating his submissions in assessment proceedings, placed his reliance on Hon’ble Calcutta High Court’s judgment in the case of CIT v. Amalendu Paul (1984) 145 ITR 439 (Cal) wherein Their Lordships had taken a view that in case an admission by the assessee was a conditional admission, it could not be relied on for imposing penalty as an unconditional admission. The assessee further submitted that non-identification of the person to whom the disputed 2,100 share belonged was not on account, of any fraud or wilful neglect and this action was in fact a genuine error as the market was in a boom condition and such an error could be a normal situation, The assessee then submitted that it could not be said that introduction of Explanation to Section 271(l)(c) has nullified the ratio of Hon’ble Supreme Court’s judgment in CIT v. Anwar Ali (1970) 76 ITR 696 (SC) and, in support of this proposition, placed reliance on Hon’ble Calcutta High Court’s judgment in the case of CIT v. M.B. Engg. Works (P) Ltd. (1986) 158 ITR 509 (Cal). It was thus submitted that the facts and circumstances of the case did not warrant or justify imposition of any penalty under Section 271(1)(c) and that in any event, since penalty cannot be imposed unless mens rea is established and since no mens rea is established in this case, imposition of penalty in this case will be contrary to the law settled by the Hon’ble Supreme Court in Anwar Ali’s case (supra), The AO, however, was of the view that it is clear that when the AO detected the discrepancies regarding availability of shares and specifically required the assessee to explain the same, vide order-sheet entry dt, 7th March, 1995, the assessee surrendered this amount and, therefore, surrender of income by the assessee cannot be said to be in good faith. The AO thus concluded that the penalty under Section 271(1)(c) is leviable on the facts of this case. Accordingly, AO imposed penalty of Rs. 14,70,000, worked out at the rate of 200 per cent of the tax sought to be avoided. Aggrieved, assessee carried the matter in appeal.
8. In appeal, apart from reiterating submissions made before the AO at different stages, a reference was made to Hon’ble Supreme Court’s judgment in the case of Sir Shadilal Sugar & General Mills Ltd. v. CIT (1987) 168 ITR 705 (SC) and certain other reported judgments in support of the proposition that unless the Revenue is able to prove that the surrendered amount is really concealed income of the assessee, imposition of penalty is not justified. Learned CIT(A), in the light of these submissions, came to the conclusion that no penalty could be levied on the facts of the present case. It was noted that no material has been brought on record to show that amount voluntarily offered by the appellant to be added to his income was in fact his concealed income. It was also observed that any penalty leviable solely on the basis of surrender made by the assessee will not be well-founded and is liable to be deleted, in the light of the judicial precedents relied upon by the assessee. The learned CIT(A) also observed that no mens rea can be attributed to the assessee and the AO has also not been able to establish the same. The penalty of Rs. 14,70,000 was thus deleted by the CIT(A). Aggrieved by this action of the CIT(A), Revenue is in appeal before us.
9. We have conscientiously heard Shri A.S. Ukil, distinguished Departmental Representative and Shri A.K. Gupta, learned counsel for the assessee. We have also carefully perused the orders of the authorities below, as well as paper book filed by the assessee, and duly deliberated upon judicial precedents on the issue in this appeal. We may mention that after this case was heard and order thereon was reserved, the hearing was re-fixed to seek assessee’s clarifications in the light of the Hon’ble Kerala High Court’s judgment in the case of CIT v. K.P. Madhusudanan (2002) 246 ITR 218 (Ker) which has since been upheld by the Hon’ble Supreme Court in the judgment reported as K.P. Madhusudanan v. CIT (2001) 251 ITR 99 (SC). The case was thus finally heard on 6th July, 2001. Revenue has primarily placed reliance on the penalty order passed by the AO. Learned Departmental Representative has taken us through the assessment order to demonstrate the circumstances in which the assessee volunteered addition to be made to his income and it was submitted that, in the given circumstances, assessee had no other option except to surrender. It has been pointed out that on 7th March, 1992, the assessee was required to disclose the source of unexplained investment that he had made in 2,100 shares of ITC Ltd. and since assessee had no reasonable explanation for the same, the assessee agreed to surrender of the value of these shares as being added to his income. Learned Departmental Representative submitted that even such an offer was infructuous because, even without the generosity of this offer, addition under Section 69 was inevitable. It was submitted that sequence of events would clearly show that there was an act of conscious concealment and that, in any event, addition under Section 69 was made on the basis of independent scrutiny made by the AO, and not on the basis of assessee’s letter dt. 25th March, 1992, as wrongly claimed by the assessee. It was also submitted that assessee’s explanation was specifically rejected by the AO and such a rejection of explanation has been specifically recorded in the assessment order itself. It was submitted that the addition has been made, under Section 69 of the Act, on account of unexplained investment detected during the scrutiny proceedings and not as income from undisclosed sources on account of disclosure made by the assessee. It is thus argued that the CIT(A) has clearly erred, on facts, by proceeding on the basis of the addition having been made proximately on account of surrender by the assessee. Learned Departmental Representative has further submitted that since the assessee has not been able to give satisfactory explanation about the existence of 2,100 shares, which were not recorded in the books of the assessee, the penalty has been rightly imposed in the light of Expln. 1 to Section 271. On the strength of these submissions, learned Departmental Representative has argued that the conclusion arrived at by the CIT(A) is erroneous, We are thus urged to vacate the order of the CIT(A) and restore that of the AO. On the other hand, learned counsel for the assessee, apart from reiterating the submissions before the authorities below and which have already been summed up earlier, submitted that distinguishing feature from K.P. Madhusudanan’s case (supra) is that there is no element of conscious concealment in this case, whereas Tribunal had given a finding to the contrary in Madhusudanaris case. A lot of emphasis is given to the fact that apart from making an addition, as surrendered by the assessee, Revenue has not brought any other material against the assessee and to the proposition that from assessee’s agreeing to addition, it does not follow that additions constitute concealed income. It is submitted that unless the Revenue is able to prove that the surrendered amount is really concealed income of the assessee, imposition of penalty is not justified and that no material has been brought on record to show that amount voluntarily offered by the appellant to be added to his income was in fact his concealed income. Learned counsel emphasized that imposition of penalty cannot be justified solely on the basis of surrender made by the assessee. It was also reiterated that since penalty cannot be imposed unless mens rea is established and since no mens rea is established in this case, imposition of penalty in this case will be contrary to the law settled by the Hon’ble Supreme Court in Anwar All’s case (supra). Learned counsel thus justified the order of the CIT(A) and urged us to confirm the same.
10. Let us first take a look at the circumstances in which this surrender is made. The AO has found out that the assessee has sold shares which are not recorded in his books of account and specific question has been raised about the source of acquisition of these shares. The assessee accepts that these shares were not accounted for in his books and yet these shares were physically with him. In other words, he accepts existence of unaccounted investment but then he does not give up. He claims that someone gave him these shares for sale but he does not remember who gave him these shares and, therefore, he cannot identify the person who gave him these shares. If assessee’s story is to be believed, an unknown person comes to the office of the assessee, gives assessee shares worth almost one and a half million rupees, neither that person bothers about these shares or sale proceeds thereof nor the assessee remembers who this person was, and finally when assessee was short of 2,100 shares to fulfil his commitment of delivery of shares, assessee uses this unclaimed property to fulfil the commitment of delivery of shares. Despite the fact that assessee has this explanation, the assessee agrees to an addition on – account of value of these shares and requests the AO “to kindly take a lenient view regarding imposition of penalty/prosecution, etc. as this offer is being made voluntarily and in good faith”.
11. To put a question to ourselves, could it be said that the addition of Rs. 14,70,000 under the aforesaid circumstances and as made by the AO, was proximately caused by the surrender made by the assessee? The answer, in our considered view, is an emphatic ‘No’. The sequence of events clearly shows that it was on account of detection of unaccounted stock of shares that an addition of Rs. 14,70,000 was made by the AO. The assessee’s letter dt. 25th March, 1992, filed less than a week before the assessment was to be finalized, was at best a prayer for taking a lenient view for penalty proceedings and it was not the case that assessee was making a surrender on account of any income which was hot already in the knowledge of the AO. The question of agreed addition can only arise when the addition itself is a result of the voluntary action by the assessee. To treat this addition as a voluntary addition, in our considered view, will be belittling the good work done by the AO which did not leave the assessee with much choice. As far as assessee’s explanation about the source of those unaccounted shares is concerned, such an explanation needs to be considered in the light of settled law which we will now come to.
12. In CIT v. Nathulal Agarwala & Sons (1985) 153 ITR 292 (Pat)(FB) Full Bench of Hon’ble Patna High Court had, inter alia, observed as follows :
“As to the nature of the explanation to be rendered by the assessee, it seems plain on principle that it is not the law that the moment any fantastic or unacceptable explanation is given, the burden placed upon him would be discharged and the presumption rebutted. It is not the law and perhaps hardly can be that any and every explanation by the assessee must be accepted. In my view, the explanation of the assessee for the purpose of avoidance of penalty must be an acceptable explanation. He may not prove what he asserts to the hilt positively but as a matter of fact materials must be brought on the record to show that what he says is reasonably valid.”
The above views were approved by the Hon’ble Supreme Court in the case of CIT v. Mussadilal Ram Bharose (1987) 165 ITR 14 (SC). Referring to the judgment of Hon’ble Patna High Court, Their Lordships observed :
“The Patna High Court emphasised that as to the nature of the explanation to be rendered by the assessee, it was plain on principle that it was not the law that the moment any fantastic or unacceptable explanation was given, the burden placed upon him would be discharged and the presumption rebutted. We agree. We further agree that it is not the law that any and every explanation by the assessee must be accepted. It must be acceptable explanation, acceptable to a fact-finding body.”
13. In the light of the above judicial precedents and as observed by Hon’ble Kerala High Court in the case of K.P. Madhusudanan (supra), “it is plain on principle that it is not the law that the moment any fantastic or unacceptable explanation is offered, the burden placed would be discharged and the presumption rebutted”. The explanation offered by the assessee should be an acceptable explanation which essentially implies that the explanation should not be totally opposed to the human probabilities.
14. The explanation given by the assessee, in our considered view, does not stand scrutiny of these tests. It is not possible to believe that an unknown person comes to the office of the assessee, gives assessee shares worth almost Rs. 15 lakhs, neither that person bothers about these shares or sale proceeds thereof nor the assessee remembers who this person was, and finally when assessee was short of 2,100 shares to fulfil his commitment of delivery of shares, assessee uses this unclaimed property to fulfil the commitment of delivery of shares. We find it difficult to believe that someone just leaves shares worth Rs. 15 lakhs in assessee’s office, never to ask any questions nor follow up about these shares again. Let us, for a minute, assume that the assessee may have had such a loyal customer but then it defies all logic to believe that the assessee does not have any particulars at all about this great soul for whom one and a half million rupees is like loose change which he leaves in assessee’s office and conveniently forgets about the same. Interestingly, it is almost a decade since these unclaimed shares were sold by the assessee but, till date, none has claimed right over the sale proceeds. In our considered view, assessee’s explanation is not acceptable in the light of the human probabilities and is in the nature of, what the Hon’ble Supreme Court has termed as, ‘fantastic or unacceptable explanation’. We, therefore, reject the assessee’s explanation.
15. We now come to CIT(A)’s stand that the penalty cannot be imposed in the case of agreed addition and unless the Revenue is able to prove mens rea of a quasi-criminal offence. Since we have already held that it is not a case of agreed addition, assessee’s arguments clearly proceed on a fallacious assumption so far as the question of ‘agreed addition’ is concerned. In any case, as to the requirement of Revenue’s establishing mens rea on the part of assessee, we may only refer to the observations of Hon’ble Supreme Court, in the case of K.P. Madhusudanan’s case (supra), which are reproduced below :
“Learned counsel for the assessee then drew our attention to the judgment of this Court in Sir Shadilal Sugar and General Mills Ltd. v. CIT (1987) 168 ITR 705 (SC). He submitted that the assessee had agreed to the addition to his income referred to hereinabove to buy peace and it did not follow therefrom that the amount that was agreed to be added was concealed income. That did not follow that the amount that was agreed to be added was concealed income. That it did not follow that the amount agreed to be added was concealed income is undoubtedly what was laid down by this Court in the case of Sir Shadilal Sugar and General Mills Ltd. v. CIT (supra) and that, therefore, the Revenue was required to prove the mens rea of a quasi-criminal offence. But it was because of the view taken in this and other judgments that the Explanation to Section 271 was added. By reason of addition of that Explanation, the view taken in this case can no longer be said to be applicable.”
(Emphasis, italicised in print, supplied, by us by underlining)
It is thus clear that in the considered view of Hon’ble Supreme Court, it is no longer necessary that Revenue is required to prove mens rea and, therefore, independent finding about the conscious concealment is no longer a condition precedent to imposition of penalty under Section 271(1)(c) r/w Expln. 1 to Section 271. The school of thought casting onus on Revenue to prove the mens rea, as advanced by the large number of legal precedents relied upon by the assessee, has been thus specifically rejected by the Hon’ble Supreme Court.
16. In view of the above discussions, we are of the considered view that the CIT(A) was not justified in deleting the penalty imposed by the AO under Section 271(1)(c) of the Act. We, therefore, uphold the imposition of penalty in principle and vacate the order of the CIT(A).
17. We have noticed that the AO has imposed the penalty at the rate of 200 per cent of tax sought to be avoided by the assessee, whereas the AO had the discretion of imposing penalty at a minimum of 100 per cent of the tax sought to be avoided and at a maximum of 300 per cent of the tax sought to be avoided. No specific reasons are given for AO’s coming to the conclusion that it is a fit case for imposition of penalty at the rate of 200 per cent of the tax sought to be avoided. We have carefully considered entirety of the case, particularly the circumstances in which addition has been made by the AO and the fact that the assessee has, in a way, co-operated with the Revenue authorities by at least not prolonging the litigation, and we are of the considered view that the imposition of penalty at the rate of one hundred per cent of tax sought to be avoided will meet the ends of justice. We, therefore, direct the AO to reduce the quantum of penalty to Rs. 7,35,000 i.e., one hundred per cent of tax sought to be avoided by the assessee.
18. In the result, appeal is allowed in the terms indicated above.