ORDER
Per Shri T. R. Thiruvengadam, Accountant Member – These are appeals for the assessment years 1972-73, 1973-74 and 1974-75. The first two appeals are by the revenue while the last appeal is by the assessee. As the matter raised in these appeals is connected, these appeals are taken up together.
2. In these appeals the question raised is whether the assessee is liable to penalties under section 271(1) (c) of the Income-tax Act, 1961 (the Act) for the three assessment years in question. The assessee carries on the business of manufacture of handlooms. For these three assessment years, the assessee had filed the returns on his own, without receiving any notice from the ITO, on 3-10-1974. For the assessment years 1972-73 and 1973-74, the assessee returned income of Rs. 9,000 and Rs. 7,920, respectively, on the basis of an estimate. The assessee had not maintained by account books for these two assessment years. For the assessment year 1974-75, the return showed an income of Rs. 15,830. The return was accompanied by a profit and loss account and a trial balance. The assessee had maintained account books for this assessment year.
3. The ITO took all these three assessments together for the purpose of enquiry and assessment. The first effective hearing was on 13-3-1975, when he scrutinised the account books for the year 1974-75. The books of account produced included a sales register and a ledger. The latter carried the sales account. The sales are entered, in the first instance, in the day-to-day account of the sales register. The total sales in a month are made out in the sales register and then entered in the sales account of the ledger. The ITO noted that the sales for the month of November 1973 were not credited to the sales account. This was on the examination made by him on 13-3-1975. He then impounded the books produced by the assessee. It may be mentioned at this stage that the practice of the assessee is to collect the bills through the banks and the sales for the month of November 1973 were also effected through the banks.
4. During the hearing on 13-3-1975, there was also a discussion regarding the basis on which the income had been returned at the figure of Rs. 9,000 for the assessment year 1972-73. The assessees counsel, who appeared before the ITO, explained that the assessee had been associating with textile business for quite some time, that the business was started on regular terms in 1975, that the opening capital has been offered for assessment for the two assessment years 1972-73 and 1973-74. An entry to this effect has been made by the ITO in the order sheet for the assessment year 1972-73.
5. On the same day, in the order sheet for the assessment year 1974-75, the ITO made an entry regarding the detection of the non-crediting of the sales for the month of November 1973. After recording that the sales had not been entered, the ITO has stated that the fact has to be verified, that for further scrutiny, the day book, ledger, sales register and sales invoices have been impounded.
6. On 22-7-1975, the assessee filed revised returns for the three assessment years in question. For the assessment years 1972-73 and 1973-74, an income of Rs. 35,000 and Rs. 33,920, respectively, was shown in the returns for these two years. For the assessment year 1974-75, income of Rs. 45,000 was shown in the return. The return for the assessment year 1974-75 was accompanied by a revised trial balance and also a statement of the computation of income. These read as follows :
Computation of income :
Rs.
Net profit as per the original return
15,830.00
Add : Sales for the month of November 1973
72,618.10
88,448.10
Less : Deficit claim in the wages account
56,412.00
Balance
32,036.00
Add : Adjustments for the valuation of closing stock
12,964.00
Total revised income
45,000.00
In the trial balance as filed with the original return the capital account of the assessee showed a credit balance of Rs. 32,398. The merchants account representing the sundry sales showed a debit balance of Rs. 2,75,986.94 and the revised trial balance filed along with the return on 22-7-1975 showed the balance in the capital account at Rs. 1,62,749.69, and the merchants account showed a debit balance of Rs. 3,48,605. The closing stock also showed a variation. The original trial balance had shown Rs. 16,540.75 while the revised trial balance showed a debit balance of Rs. 29,504.75.
7. The assessee also enclosed a letter with the return on 22-7-1975. It was stated there that the assessee suspected some omissions in the account with regard to wage payments and the sales turnover credited in the accounts, that the basic records relating to these accounts were once again scrutinised and he had been able to find that there have been some omissions in the accounts. He also stated that this omission was with regard to the manufacturing wages, the sales turnover credited and the stock balance. According to him, there was a deficit of Rs. 56,412 in the wages account on the basis of the cloth actually produced. He also stated that the sales turnover did not include the turnover for the month of November 1973. He referred in this letter to the computation of income in the revised return filed along with this letter. In this computation, he has made three adjustments to the income originally shown. He added the sales for the month of November 1973 and also the increase in the value of closing stock to the extent of Rs. 12,964. He deducted the deficit claim by this account. The ITO sent a letter on 6-8-1975 to the assessee. In this letter he has pointed out that the scrutiny of the account revealed that sales totalling Rs. 72,618 for the month of November 1973 had not been credited to the sales account. He challenged the statement of the assessee that the omission to include the sales amounting to Rs. 72,618 was detected on the basis of some suspicion. He requested the assessee to produce evidence regarding the claim for wages amounting to Rs. 1,72,574 which included an extra amount of Rs. 56,412 in the revised return. The assessee sent a reply to this on 28-8-1975. He pointed out that there was no suppression of the sales turnover from the accounts and that if there was any such attempt, the assessee would not have produced before the ITO the sales register and the invoices which clearly showed that there were sales in the month of November 1973. He submitted that the omission was only of a bona fide omission and not a willful suppression as suspected by the ITO. The assessee further pointed out that in his earlier letter accompanying the return he had stressed this point that such omission had caused concern to him and arising out of such concern the basic records were scrutinised. He also gave the basis for the claim for wages as worked out on the basis of the quantity of cloth manufactured by him. In a letter written by him on the next day, he pointed out certain other mistakes regarding the outstanding balances in the accounts of three parties, namely, Sankar and Company, Cannanore Raja Rajeshwari Export, Azhikode, and Raja Rajeswari Wvg. Mills, Azhikode. He pointed out that the balance were only Rs. 66,175.86 in all as against Rs. 1,10,945. He also pointed out that there were differences in the opening balance as on 1-4-1973. The difference was Rs. 49,470. This was stated by him to show that some of the payments made to the creditors during 1971-72 and 1972-73 accounting years have not been properly considered while arriving at the opening balance for 1972-73. This was followed up by a third letter dated 2-9-1975 where he reworked the balance and worked out the capital as on 31-3-1974 at Rs. 1,62,749.69 He explained this accretion in the capital account on 31-3-1974 partly by assigning a value of Rs. 63,397.67 for all items of assets which were in the possession of the assessee prior to 1-4-1971, Rs. 70,000 as income declared for the two assessment years 1972-73 and 1973-74, Rs. 45,000 as income declared for the assessment year 1974-75 and Rs. 31,370 as the capital accumulated as on 1-4-1971 apart from the assets. He pointed out that the business had run for a number of years before 1-4-1971 and, therefore, this accumulation of capital of Rs. 31,370 was proportionately substantial. Yet another letter was written on 2-7-1976. The assessee filed along with this letter a balance sheet as on 31-3-1975 where the capital account showed a balance of Rs. 2,03,196. In this letter he pointed out that since the accounts have not been properly maintained, the income has been estimated on the basis of the increase in the assets over the liabilities for the year 1974-75 as well. The assessments for the years 1972-73 and 1973-74 were completed on a total income of Rs. 37,500 each, while the assessment for the year 1974-75 was completed on a total income of Rs. 49,000. The variation made by the ITO is on the ground that the assessee had not taken into account the proper quantification of expenditure for personal expenses for these assessment years. Additions of Rs. 2,500 for the earlier two assessment years and Rs. 4,000 for the assessment year 1974-75 were made by him. Otherwise, the ITO accepted the basis of the computation of income for these assessment years viz., the periodical accretion to the net assets of the assessee for these three assessment years.
8. The ITO also initiated proceedings under section 271(1) (c) and levied penalties of Rs. 30,000 for the assessment years 1972-73 and 1973-74 and Rs. 35,000 for the assessment year 1974-75, respectively. The ITO adverted to the fact of scrutiny of the accounts wherein the omission to record in the sales account the sales for the month of November 1973 occurred and was of the view that but for this detection, there may not have been any revised return. He considered that there was a suppression of sales to the extent of Rs. 72,618. He considered that subsequently, in order to balance in the balance sheet, the assessee had adjusted the sundry debtors account. On the basis of these, he felt that the assessee was liable to a penalty under section 271(1) (c). This is for the assessment year 1974-75. For the assessment years 1972-73 and 1973-74, the ITO has adverted to the same instance of the discovery of the omission to ledgerise the sales for the month of November 1973. He also adverted to the difference in the balances carried forward by the assessee in respect of the sundry debtors (which the assessee had pointed out in his correspondence with the ITO). He also considered that in these circumstances, the assessee was liable to penalty under section 271(1) (c) for these two assessment years as well.
9. On appeal, the Commissioner (Appeals) confirmed the penalty for the assessment year 1974-75, while he deleted the penalties levied for the two assessment years 1972-73 and 1973-74. He based his confirmation of penalty for the assessment year 1974-75 on the factum of the omission to ledgerise the sales for the month of November 1973 and the admission of the assessee that such omission was, in fact, present in the account of the assessee. He also adverted to the fact that the assessee had omitted to include in its expenditure the relevant charges and other expenses for the month of November 1973 also. This, according to the Commissioner (Appeals), suggested a planned procedure adopted by the assessee for understating the income deliberately.
10. For the assessment year 1972-73, the Commissioner (Appeals) was of the view that the ITOs assessments were only the estimate based on the accretion to the wealth of the assessee without a finding that the assessee had earned this specific amount during the previous year. He also pointed out the decision of the Patna High Court in the case of Badshah Prasad v. CIT (1981) 127 ITR 601 and of the Delhi High Court in the case of Qummar-Ud-Din & Sons v. CIT (1981) 129 ITR 703 and held that the penalty under section 271(1) (c) was not justified. He observed that the original return was filed by the assessee on an estimate, that when the assessee found subsequently on the basis of accretion to his wealth that the return filed by him did not disclose that correct income, the revised return was filed before the ITO initiated any enquiry into his affairs for this assessment year. The order for the assessment year 1973-74 was similar and he cancelled the penalties for the years 1972-73 and 1973-74.
11. In the appeal for the assessment year 1974-75, it is submitted on behalf of the assessee that the omission to ledgerise the sales for the month of November 1973 is an admitted fact but this was only a bona fide mistake. The discovery by the assessee of this omission was at the same time as by the ITO and the assessee had immediately taken all steps under his command to correct this error. The assessees action in this regard was not limited to a mere correction of this particular omission but a complete re-examination of the entire accounts bringing to light certain other omissions which were not merely items of credit but also items of debit like expenditure not fully taken into account. It is submitted that the subsequent conduct of the assessee in giving up the basis for his return for this assessment year as the books of account and in working out the net increase in the wealth not only for this assessment year but also for the earlier two assessment years revising on his own, the incomes shown from those assessment years at figures much higher then the figures shown in the original return clearly indicated that there was no design on the part of the assessee in not ledgerising the sales for the entire month of November 1973. There was omission to transfer the sales by way of credit to the sales account, but that omission just happened without any further overtones. It is further pointed out that the basis for the assessment made by the ITO is not by way of correcting the omission in the sales account but by adopting the same basis as adopted by the assessee in the revised return, viz., the accretion to wealth from year to year. In these circumstances, it is contended that there is no justification for the levy of penalty under section 271(1) (c) for this assessment year basing merely on an omission, pure and simple, by the assessee to make an entry in the account books. It is pointed out that the assessee had himself produced the sales register and the invoices before the ITO. It is only the examination of the sales ledger and a comparison of the sales account in the ledger that had revealed the omission to record this particular sales in the register. If the assessee had by any design suppressed the turnover, it would not have been done in this manner, he would have completely omitted the entire turnover from all his account books. Even if the entries have been made, those would not have been produced before the ITO. The assessee had produced the books and this could be only because the assessee had a bonafide belief that the books reflected his business transactions in their entirety and, therefore, were in support of the returns filed by him. The same arguments are advanced in respect of the assessment years 1972-73 and 1973-74.
12. The departmental representative, on the other hand, pointed out that the virtual admission by the assessee of concealment of income by comparison off the two sets of returns for these three assessment years clearly indicate that the assessee had omitted to show his income in the first set of returns filed for these three assessment years. It is submitted that the revised returns filed on 22-7-1975 cannot be considered to be voluntary. They were caused by the enquiry conducted by the ITO for the assessment year 1974-75. It is also submitted that merely because the income has been computed on the basis of an estimate, it cannot be said that there can be no question of penalty under section 271(1) (c) being levied. The departmental representative relied on the decision of the Delhi High Court in the case of Durga Timber Works v. CIT [1971] 79 ITR 63. It is submitted that the case of the assessee is on all fours in that there was virtually an admission of concealment. Reliance is also placed on the decision of the Punjab and Haryana High Court in the case of Mahavir Metal Works v. CIT [1973] 92 ITR 513 in this regard. The further citations made by the departmental representative are : CIT v. J. K. A. Subramania Chettiar [1977] 110 ITR 602 (Mad.), Western Automobiles (India) v. CIT [1978] 112 ITR 1048 (Bom.) CIT v. Krishna & Co. [1979] 120 ITR 144 (Mad.) and Union Engg. Co. v. CIT [1980] 122 ITR 719 (Ker.)
Relying on the decision of the Madras High Court in the case of Addl. CIT v. E. Bhoopathy [1978] 113 ITR 188, it is submitted that even if no accounts were maintained and the assessment is completed on the basis of an estimate, it cannot be held that penalty cannot be imposed. Relying on the decision of the Calcutta High Court in the case of Kumar Jagadish Chandra Sinha v. CIT [1982] 137 ITR 722, it is submitted that where an assessee filed a revised return, he, in fact, admits that the original return filed by him was not correct and complete. Relying on the decision of Kerala High Court in the case of CIT v. Haji P. Mohammed [1981] 132 ITR 623, the departmental representative submitted that even though the income is assessed on an estimate basis, the fact that certain receipts had been shown by that assessee, who was a contractor, establishes concealment of income. It is also submitted that the Calcutta High Court confirmed a penalty in the case of Rahmat Development & Engg. Corpn. v. CIT [1981] 130 ITR 602 where the question was regarding a discrepancy in the cost of construction of a building. On these submission, it is requested that the order of the Commissioner (Appeals) for the assessment year 1974-75 should be confirmed and the orders of the ITO for the assessment years 1972-73 and 1973-74 should bee restored.
13. We are of the view that on the facts of this case, there is no liability for a penalty under section 271(1) (c) for any of these three assessment years. The facts have been narrated in detail earlier. The fact that the sales for the month of November 1973 were in their entirety omitted to be posted to the sales account in the ledger is not disputed by the assessee. This omission, in our opinion, is just a clerical mistake on the part of the assessee. If it were otherwise, the assessee would not have produced before the ITO the sales register and the invoice register. An examination off these registers would show this omission. We are of the view that this is only a simple omission on the part of the assessee. The subsequent conduct of the assessee in rectifying this positions bears out this conclusion of ours. The assessee had not merely tired to correct this omission but has scrutinised the account, scrutinised the reasonableness of the incomes returned for the three assessment years and had rejected the accounts maintained by him for the assessment year 1974-75 as providing any basis for the correct return of income, for these three assessment years. In the course of such examination the assessee has corrected not merely his omission but also certain other mistakes and has offered for assessment different higher figures for these years. These figures offered for assessment are on the basis of the accretion to the wealth of the assessee over the period of years. The ITO has also accepted such basis for making the assessments. Further, as pointed out by the Commissioner (Appeals), the return for the assessment years 1972-73 and 1973-74 were estimated based on the capital available with the assessee and the assessee had revised these returns upwards without any inquiry by the ITO into the affairs of the assessee for these two years. In these circumstances, it is difficult to accept the proposition of the revenue that there was concealment on the part of the assessee warranting levy of penalty under section 271(1) (c) for the three assessment years under appeal.
14. The departmental representative has cited a number of cases. We do not think that these decisions would govern the issue raised in these three appeals. It is noticed that in these decisions the accepted fact was admission of concealment of income. In the case of the assessee here there is an admission but the admission is only about the omission which would not in all cases give the same connotation as concealment. There could be bona fide mistakes and errors. There can be no dispute about the proposition laid down in E. Bhoopathys case (supra) that even when the income is estimated there should be a penalty under section 271(1) (c) but that is not the same as saying that in all cases where there is an estimate penalty under section 271(1) (c) should be levied. The same consideration would go for cases off admission off omission of income. The point in Kumar Jagadish Chandra Sinhas case (supra) is not directly on the issue here. It is only the question as to when the offence of concealment was complete. The presupposes the act of concealment. It was held that when there was concealment in the original voluntary returns filed, the revised returns did not obliterate such offence. The decision of the Kerala High Court in the case of Haji P. Mohammed (supra) is also on a different issue. The question there was whether the non-maintenance of the books of account could be pleaded as a reply to the fact of concealment which was taken to been established in that case. The point in Rahmat Development & Engg. Corpn.s case (supra) is also on a question of estimate of the cost of construction and the question was whether, when the ITO had resorted to such estimate, penalty could be levied under section 271(1) (c). These cases have no application to the facts of the case before us and to the point involved in these appeals. As stated earlier, there has been only an omission on the part of the assessee. That was the starting point for action not only by the ITO but also by the assessee. Such action resulted in a revision of the incomes to be assessed for these assessment years. The very basis for making the assessments, especially for the assessment year 1974-75, has been changed from the original return to an estimate on the basis of accretion to net wealth every year. In determining such basis, the action of the assessee pointing out other mistakes in the accounts has to be taken due note of.
15. The Commissioner (Appeals) has referred to the decision of the Patna-High Court in the case of Badshah Prasad (supra) and of the Delhi High Court in the case of Qammar-ud-Din & Sons (supra). These decision have analysed the position regarding the levy or non-levy of penalty under section 271(1) (c). In a similar case, the Patna High Court has held that if the revision of the return is an honest and bona fide one, that is to say, of an omission having been made inadvertently or without due knowledge of the state of affairs, it would not be a case for levy of penalty under section 271(1) (c). It was further held that it is imperative that facts must be established to indicate that the revision of the original return was to camouflage an omission deliberately made. We are of the opinion that such is not the case here. The observation of the Delhi High Court in Qammar-ud-Din & Sons case (supra) quoted by the Commissioner (Appeals), also point to the same effect. We feel that in these circumstances no penalty can be levied for the assessment year 1974-75 is cancelled. The action of the Commissioner (Appeals) in cancelling the penalties levied for the assessment years 1972-73 and 1973-74 is upheld.
16. In the result, the appeals by the revenue are dismissed while the appeal by the assessee is allowed.
