ORDER
T.V. Rajagopala Rao, Judicial Member
1. These are five appeals filed by the assessee against the orders of the Commissioner of Income-tax (Appeals), Visakhapatnam, dated 11-1-1986 confirming the imposition of penalties under Section 271(1) (c) of the IT Act, for assessment years 1975-76 to 1979-80. The penalties imposed and confirmed for these five assessment years are as follows :
Assessment year Amount of penalty
Imposed and
sustained
Rs.
1975-76 1,43,400
1976-77 2,23,880
1977-78 43,824
1978-79 5,192
1979-80 1,36,777
For the sake of convenience these appeals can be consolidated and disposed of by a common order.
2. The facts leading to these appeals may briefly be stated as follows. The assessee is a firm of four partners and it came into existence in 1968. The firm is carrying on the business as transport contractors at Vijayawada. The assessee firm did not own any lorries of its own. They arrange lorries for transport on brokerage, commission or on contract basis. The assessee firm used to maintain regular books of account. It had taken a contract to provide transportation to M/s KCP Ltd. Vuyyur, of Krishna District as well as Jeypore Sugar Ltd. Chagallu of West Godavari Dist., for transportation of sugar from their factories to Visakha-patnam port, for purposes of export of sugar to foreign countries. The State Trading Corporation of India fixed the rates of Rs. 16.80 and Rs. 14.40 per bag as reasonable rates for transportation of sugar from Vuyyur and Chagallu respectively to Visakhapatnam Port. As against those rates the assessee firm was appointed as transport agent by M/s KCP Ltd. and M/s Jeypore Sugars Ltd. on payment of Rs. 10.80 per bag for the accounting year relevant to assessment year 1975-76 and Rs. 11.50 per bag for the accounting year relevant to assessment years 1976-77 to 1979-80. The corresponding rate at which the assessee firm was appointed as their transport agent was Rs. 9.75 per bag. A number of allegations were made against the management of both the abovesaid sugar companies alleging that their respective Managing Directors received ‘kickbacks’ from the transport contractors. The allegations were made by the shareholders of those two respective companies. The department conducted search and seizure operations on 30-9-1979 in the premises of the said companies, the residences of the Managing Directors of those two companies, their friends and associates, as well as, on the premises of the assessee firm. No incriminating material was found nor seizure of any assets such as cash, jewellery was made from, the assessee firm.
3. By the date of the search and seizure operations the assessment of the assessee firm for 1975-76, 1976-77 and 1977-78 were completed, whereunder the returned incomes were almost accepted except routine additions. The original assessment orders for 1975-76 to 1977-78 completed Under Section 143(3) were provided at pages 122-129 of the First paper book filed on behalf of the assessee firm. Subsequent to the search and seizure operations the files of the assessee firm were transferred to Income-tax Officer, Central Circle, Vijayawada. Hitherto, it was being assessed by the Income-tax Officer, B-Ward, Vijayawada. During the course of inquiries the Income-tax Officer obtained (a) schedule of rates fixed by the Lorry Owners Association at Vijayawada, (b) rates paid by M/s Coroman-del Fertilizers for transportation of their goods from Visakha-patnam to various points in Andhra Pradesh, (c) actual rates paid towards transportation charges of sugar from Challaspally to Visakhapatnam by M/s Challapally Sugars Ltd. The Income-tax Officer also contacted some lorry owners who had deputed their lorries for transportation of sugar from Vuyyur to Vizag and from Chagallu to Vizag and who received hire charges from the assessee firm. Inquiries thus conducted by the Income-tax Officer revealed that the assessee had inflated hire charges paid to the lorry owners. Therefore the assessments for 1975-76 to 1977-78 were reopened. The incomes assessed in the reopened proceedings for all these five years amounted to Rs. 41,40,452. Copy of the reassessment order dated 27-6-1980 for assessment year 1977-78 was provided at pages 49 to 57 and for assessment year 1978-79 at pages 58 to 68 of the First paper book filed by the assessee.
4. The assessee preferred appeals and simultaneously approached the Commissioner, Central, Karnataka, for an amicable settlement with a request to take a reasonable view of the circumstances and for recommending to agreed assessments. On request by the department the CIT (A) before whom the appeals were filed for assessment year 1977-78 to 1979-80 were set aside and the Income-tax Officer was directed to make the assessments afresh and according to law after examining the evidence regarding inflation of expenditure which may now be produced. The order of the CIT (A). Hyderabad, dated 26-10-1982 was provided at pages 46-48 of the First paper book filed by the assessee. After the CIT (A) thus disposed of the appeals for assessment years 1977-78 to 1979-80, the Income-tax Officer framed assessments for each of the five assessment years under consideration on 19-5-1983, copies of which were provided at pages 32 to 45 of the the First paper book filed on behalf of the assessee.
5. While completing the assessments dated 19-5-1983 notices for levying penalties were issued Under Section 274 read with Section 271 for concealment of income. Before the completion of assessments dated 19-5-1983 a written representation was made by the assessee firm to the CIT, Central, Karnataka, inter alia, alleging that the net receipts from KCP Ltd. and Jeypore Sugars Ltd., in assessment years 1975-76 constituted 43%, for 1976-77 40%, for 1977-78 15%, for 1978-79 4% and for 1979-80 41 % of the total gross receipts of the assessee firm. The receipts from other business except from the above two companies, formed the major turnover and the same was accepted by the department. It is only in respect of the receipts from the two companies, referred to above, the department sought to make huge additions which will work out to Rs. 41,40,452 and on which the tax payable by the assessee firm as well as the partners worked out to more than Rs. 30 lakhs. The assets held by the firm are far less than the tax payable. None of the partners of the assessee firm are wealth-tax assessees and in the assessment years in question none of the partners acquired any assets. They requested that all the above factors may be considered in arriving at the income assessable in their hands. The CIT, Central, by his orders dated 9-8-1983 directed that inflation in hire charges paid may be taken at a sum of Rs. 50 per lorry per trip. According to the direction given by the CIT, Central, the Income-tax Officer completed the assessments dated 19-5-1983. He has also started penalty proceedings. In pursuance of the penalty notices the assessee firm filed written explanation dated 23-11-1985 before the Income-tax Officer, a copy of which is furnished at pages 1 to 5 of the second paper book filed by the assessee. Mainly the assessee firm stated : (1) that they have not inflated any lorry freights, (2) their agreement to the solution offered by the CIT, Central, was only to avoid protracted proceedings but not on account of any concealment on their part, (3) that at the time of settlement they have agreed to the solution given by the Commissioner on condition that no penalties would be levied upon them and (4) the assessments having been completed on that basis penalties may not be levied, more so when no concealment was established and when only additions were made, on estimate or agreed basis. Therefore, they requested to drop the penalty proceedings. The Income-tax Officer while completing the penalty proceedings felt the explanation offered by the assessee as unacceptable and imposed penalties already adverted to above. It is mentioned in the independent penalty orders that when he got inquiries made through the Income-tax Inspector about half a dozen lorry owners gave their statements as to the hire charges they received from the assessee firm. All of them have stated that they have not received that much of amount as has been claimed by the assessee firm. Thereupon the Income-tax Officer afforded opportunity to the assessee firm to cross-examine these individual lorry owners but the assessee firm did not choose to cross-examine any of them. He held that the conduct of the assessee clearly shows that it had deliberate knowledge about the factum of inflation of hire charges and it had only tried to see that the quantum of such inflation is fixed at an advantageous figure and with this view only, the assessee firm approached the CIT, Central, for settlement and finally accepted the solutions suggested by him. Ultimately, the CIT, Central, after going through the submissions made by the assessee firm and the material on record directed that a sum of Rs. 50 per lorry per trip may be added as inflation of hire charges. From this it was concluded that inflation of hire charges had been proved beyond a show of doubt. The Income-tax Officer further held that if really the assessee had not inflated the expenditure and there was no material with the department to substantiate the charge, there was no necessity of any protracted proceedings and there was also no necessity of accepting the directions given by the CIT, Central. The next submission that the assessee firm accepted the directions given by the learned Commissioner, Central, on condition that no penalties should be levied upon them was not backed by any record. He further held that no valid reasons or cogent explanation were given or was forthcoming for difference between income returned and income assessed. The Income-tax Officer thus having rejected the explanation as well as contentions put forward before him, levied penalties as noted in the beginning of this order.
6. Aggrieved against the independent orders of penalty passed for each of these assessment years the assessee firm came up in first appeal before the learned CIT (A), Visakhapatnam. During the course of hearing before the learned CIT (A) it is stated that the learned counsel of the assessee firm was asked to point out the evidence, if any, available in the assessee’s case to prove that there is no fraud or any gross or wilful neglect on the part of the appellant. The learned CIT (A) held that the assessee could not do so. On the other hand he further recorded in the impugned orders that there was sufficient material to show that fraud was perpetrated by the assessee. He further recorded that it is only after the Income-tax Officer proved to the hilt that the expenditure was inflated by the appellant, the appellant firm agreed for inclusion for the part of inflated expenditure by way of settlement. Therefore, he concluded that the Explanation to Section 271(1)(c) which was in the statute book up to 31-3-1976 automatically applied and levy of penalty should follow. He further held that the assessee firm made false entries in its accounts which was deliberate and made with a view to suppress the actual income. Ultimately, he held that imposition of penalties for each of the five years under consideration is justified. He also followed the case law cited below :
CIT v. Gates Foam & Rubber Co. [1973] 91 ITR 467 (Ker.),
India Sea Foods v. CIT [1978] 114 ITR 124 (Ker.),
CIT v. M. Habibullah [1982] 136 ITR 716 (All.)
Alternatively, the learned CIT (A) fe]t that the conduct of the assessee in placing for acceptance, before the Income-tax Officer, a highly inflated debit as genuine, will constitute furnishing of inaccurate particulars of its income and the said conduct attracted Section 271(1)(c). As against the confirmed penalties the assessee firm came up in further appeal before this Tribunal and thus the matter stands for our consideration.
7. We have heard Sri CVK Prasad, learned counsel for the assessee and Sri N. Santhanam, learned departmental representative. It is submitted by Sri Prasad that the STC paid Rs. 16.20 per bag towards transportation charges from Vuyyur to Visakhapatnam. The contract is between STC on the one hand and KCP Ltd. on the other. From Chagallu to Vizag the STC paid Rs. 14.40 per bag. However, the KCP Ltd. in its turn paid the assessee firm only Rs. 11.50 per bag for transporting sugar bags from Vuyyur to Vizag and Rs. 9.75 per bag for transporting sugar bags from Chagallu to Vizag. When the STC itself was considering payment of Rs. 16.80 per bag from Vuyyur to Vizag and Rs. 14.40 from Chagallu to Vizag as reasonable how can it be said that payment of Rs. 11.20 per bag and Rs. 9.50 per bag towards transportation charges from Vuyyur and Chagallu, respectively to Vizag unreasonable, excessive and inflated. He contended that each time it had to mobilise a huge fleet of 60 to 70 lorries at a time for transporting sugar from the sugar factories at Vuyyur and Chagallu to Vizag. Normally it is highly difficult to get cargo on return trip from Vizag to Vuyyur or Chagallu. Normally the lorries have to return empty. Sri Prasad further submitted that for assessment year 1978-79, for instance, 1328 trips carrying on 11,952 bags were transported through lorries from Vuyyur and Chagallu to Vizag. The five or six lorry owners whom the department was stated to have examined were having lorries all of which made only 32 trips in the accounting year relevant to assessment year 1978-79 and they have transported a meagre number of 460 bags. Thus, five or six lorry owners whom the department was stated to have examined and the bags they have transported in their lorries constituted only negligible portion. It is stated that as per the information furnished at page 149 of the second paper book filed on behalf of the assessee the rate of net profit earned by the assessee firm is quite comparable with other contractors in the same line of business. For assessment year 1977-78 the percentage of profit derived by the asseesee was 4.8% whereas in the case of Sri Venkatarama Transport the percentage of profit accepted constituted only 3.4% and in the case of M/s Prakash Transport the percentage accepted was 2.4%. In the accounting year relevant to assessment year 1978-79 the percentage of profit shown by the assessee firm was 4.6% whereas M/s Ramannoya Transport at Vijayawada had shown only 3.85%, M/s Prakash Transport had shown only 3.1 % and M/s B. Seshagiri Rao and Sons had shown 3.84%. As can be seen in the accounting year relevant to 1978-79 the assessee firm had shown the highest percentage of profit that the other contractors in the same line. It is stressed that to mobilise 60 to 70 lorries on a very short notice at a time is a very difficult task. Time is the essence of the contract. If any delay occurred in delivery of goods at Visakhapatnam port, the assessee firm would be liable to heavy damages, as per the terms of the contract entered into with KCP Ltd. and M/s Jeypore Sugar Co. Ltd. On one or two occasions the assessee firm had to pay heavy damages which ran to more than Rs. 20,000 to M/s KCP Ltd. on account of damage or delay in delivery of Sugar load at the port. He further stated in the accounting year relevant to assessment year 1975-76 the rate paid by the KCP Ltd. to the assessee firm was Rs. 10.80 per bag, whereas freight charges paid by the assessee firm to the hired lorries were Rs. 10.50 per bag and whereas in the accounting year relevant to assessment year 1976-77 to 1979-80 the rate paid by M/s KCP Ltd. to the assessee was Rs. 11.50 per bag as against the rate paid by the assessee firm to the hired lorries towards freight charges was Rs. 11.20 per bag. In all 9,674 trucks were engaged and 8,80,786 bags of sugar transported from M/s KCP Ltd. Vuyyur to Visakhapatnam. So also, according to the contract entered into with M/s Jeypore Sugar Co. Ltd. Chagallu for the accounting years relevant to assessment years 1975-76 to 1978-79 the assessee firm was paid Rs. 9.75 per bag whereas in its turn the assessee firm paid Rs. 9.50 per bag for the accounting years relevant to assessment years 1975-76 and 1976-77 and Rs. 9.25 per bag for the accounting years relevant to assessment years 1977-78 and 1978-79. For the accounting years relevant to assessment years 1975-76 to 1978-79 the total trips made from Chagallu to Vizag were 3871 and the total bags transported were 3,38,691. It is submitted that the cases of M/s Coromandel Fertilizers and M/s Challapally Sugars Ltd. were not at all comparable cases with that of the assessee firm.. M/s Coromandel Fertilizers is situated in Visakhapatnam which is a port and an end point where lorries from all over Andhra Pradesh unload their cargo and they would be available for return trips at concessional transport rates. As regards M/s Challapally Sugar Co. the quantity exported by the factory was small and the trips were few and far between. He further submitted that the rates suggested by the Lorry Owners Association were only advisory and they were suggested in ordinary circumstances, without taking into consideration the special factors or features in a given case. The transport charges in other type of transport which was reflected in the assessee’s books of account clearly establish that there must be some special circumstances under which the assessee was obliged to pay higher rate to the lorries engaged under these two particular contracts. Had it been the general practice of the assessee firm to inflate freight charges, it would have resorted to the same method even in the case of the other type of transport work it undertook in the relevant accounting years. The very fact that they have debited lesser freight charges in some cases and higher freight charges under these two contracts, lends support to the theory that freight charges paid under these two contracts must have been true. It is no doubt true that the freight charges paid worked out to 1 1/2 times the rate fixed by the Income-tax Officer. This is because of the risk and the special features involved in the execution of these two transport contracts, Gathering a fleet of 60 to 70 lorries at a time and on a short notice requires that unless one pays some extra amount it would become impossible. Secondly, when a large fleet of 60 to 70 lorries unload their cargo at the port mouth of Visakhapatnam securing lorry loads in the return trip would not be an easy task and therefore the lorry owners charge keeping in mind the non-availability of the cargo in the return trip. Further as pilferage and. other things of a valuable commodity like sugar should not occur, only reliable persons and their lorries have to be selected. Thus even though there was some increase in the freight charges felt to have been paid under these contracts, the payment should have been considered as as genuine. The Income-tax Officer very much relied upon depositions recorded from five or six lorry owners. All except one have no books of account. Even the one lorry owner who claims to have maintained the books of account entries in his books cannot be relied upon as the assessment was completed in his case, only Under Section 143(1). Further lorry owners never used to come for payment of balance freight. On receipt of intimation from the factories the assessee firm used to send empty lorries to the factory site for loading and export and those lorries used to be loaded with stocks and despatch memos used to be prepared by the assessee firm in respect of each lorry load containing particulars of consignor, consignee, total freight, advance freight paid and the balance freight payable. On these despatch memos signature of lorry driver used to be obtained. At the destination point after the goods were unloaded and delivered to the clearing and forwarding agents, M/s Parry & Co. Ltd. and their sub-contractors M/s Rao and Reddy they used to give the ‘goods received note’ to the driver. Whosoever produces this ‘goods delivery note’ to the assessee firm would be paid the balance freight. This note (goods delivery note) is in the nature of a negotiable instrument and they can be encashed with the assessee-firm by any holder of the said note. Therefore, the owner of the lorry was never used to be in the picture. Thus, the statements given by the lorry owners carry no weight since they have no direct dealings with the assessee-firm. In the case of these two contracts the assessee-firm used to derive 5 per cent of net profit, whereas in the case of commission business the net profit used to be 3 per cent.
8. Now the learned counsel for the assessee submitted the legal position as follows. For assessment year 1975-76 the following explanation applies :
Explanation – Where the total income returned by any person is less than eighty per cent of the total income (hereinafter in this Explanation referred to as the correct income) as assessed under Section 143 or Section 144 or Section 147 (reduced by the expenditure incurred bona fide by him for the purpose of making or earning any income included in the total income but which has been disallowed as a deduction), such person shall, unless he proves that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income for the purposes of Clause (c) of this Sub-section.
He submitted that if he is able to convince this Tribunal that the lorry freight was incurred bona fide by the assessee-firm, then the extra freight which was not accepted as a genuine payment by the ITO should be excluded, while computing the correct income of the assessee. Now he submitted that ultimately the question boils down to the consideration whether the lorry freight which is said to have been paid by the assessee-firm and entered in its books of account, during the accounting years, relevant to these five years was incurred bona fide by the assessee-firm, though some of such freight was disallowed as a deduction by the ITO. In this connection, the learned counsel drew our attention to the leading case delivered by the Andhra Pradesh High Court on the subject viz., Addl. CIT v. Burugupalli China Krishnamurthy [1980] 121 ITR 326. In that case the scope of the Explanation extracted above which was in the statute book from 1-4-1964 to 31-3-1976 was considered fully and exhaustively. In that case the question was whether after the insertion of the Explanation the ratio of the Supreme Court decisions in CIT v. Anwar Ali [1970] 76 ITR 696 and CIT v. Khoday Eswarsa & Sons [1972] 83 ITR 369, where it is held that penalty proceedings are penal in character, that the onus is on the department to show that a particular receipt or amount is of revenue nature that where there is no positive evidence of concealment no penalty is imposable were still good law or not. Their Lordships held in unequivocal terms that even after the Explanation adverted to above the legal position that is applicable to the penalty proceedings as enunciated by the Supreme Court in the above two cases does not materially alter. In Anwar All’s case (supra) the Hon’ble Supreme Court approved the view taken by the Bombay High Court in CIT v. Gokuldas Harivallabhdas [1958] 34 ITR 98. It is stated in that case that the proceedings Under Section 28 of the IIT Act, 1922, are all of penal nature and the burden is on the department to prove that a particular amount, is a revenue receipt. The mere fact that the explanation offered by the assessee is found to be false does not give rise to the inference that the disputed amount represents income. It is further stated that though the finding given in the assessment proceedings for computing tax is not conclusive yet it forms good evidence. Before penalty can be imposed the entirety of the 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 deliberately furnished inaccurate particulars of such income. Their Lordships of Andhra Pradesh High Court having considered the Supreme Court cases and also a previous case decided by the same High Court in CIT v. Koduri Papa Rao [1976] 102 ITR 834 (AP), where it was held, inter alia, that penalty cannot be levied solely on the basis of reasons or findings given in the assessment proceedings. Summing up the legal position their Lordships held that prior to the coming into force the Explanation already referred to supra, onus is on the revenue to establish that the assessee has concealed particulars of his income or furnished inaccurate particulars of such income to make him liable to penalty. Then they have considered whether the Explanation referred to above made any change in the position of law. They held that Explanation only places an initial burden which is not absolute on the assessee to prove- that he had not concealed the particulars of his income or furnished inaccurate particulars of such income. The Explanation does not absolve the department from establishing the necessary facts for levying penalty under the provisions of Section 271(1)(c). Dealing with the nature of initial burden cast upon the assessee by the Explanation their Lordships held that the initial burden under the Explanation is akin to that of one in civil cases. Where the determination is made on preponderance of probabilities, the assessee need not prove by any positive evidence, to discharge his burden. He may rely upon the material already on record. The burden placed on the revenue to bring a case within the four corners of Section 271(1)(c) is akin to that of the prosecution in criminal cases. The mere fact that the word ‘deliberately’ is omitted by the Finance Act, 1964, would not in any way alter the legal position with regard to the revenue’s burden to prove that the assessee has concealed the income or furnished in-accurate particulars of such income. The assessee need not adduce specific evidence in this regard as to absolve himself from which being held that he has failed to return the total assessed income on account of any fraud or gross or wilful neglect on his part. He can certainly take advantage of the material available on record and substantiate his stand in this regard. Where there is no material other than the falsity of the explanation relating to the addition of income in the assessment proceedings it cannot be said that the revenue had discharged its onus to establish that the assessee has concealed particulars of his income or furnished in-accurate particulars of such income. Ultimately, they held that the levy of penalty can be justified only on proof of two factors : (1) there must be sufficient material to conclude that the disputed amount really represents the assessee’s income apart from the false explanation or inability of the assessee to satisfactorily prove that it is not income and (2) there was conscious concealment or conscious furnishing of inaccurate particulars of his income.
9. The question whether Burugupalli China Krishnamurthy’s case (supra) was correctly decided or not was referred to a Full Bench of the Andhra Pradesh High Court in CIT v. H. Abdul Bakshi & Bros, [1986] 160 ITR 94. Ultimately, the Full Bench did not decide the question whether Burugupalli China Krishnamurthy’s case (supra) was correctly decided or not as their Lordships felt that it would be a matter of mere academic interest from the facts and circumstances of the case before them and it would be quite unnecessary to examine the question referred. However, the Full Bench considered the ambit of explanation as follows. Explanation, according to the Full Bench, raised two presumptions : (1) the amount of the assessed income is correct income and it is in fact the income of the assessee and (2) the failure of the assessee to return the correct assessed income was due to fraud, or gross or wilful neglect on the assessee’s part. The presumptions raised under the explanation are not conclusive but rebuttable. The assessee can be said to have discharged the initial burden by preponderance of probabilities and evidence. Such a burden can be discharged by the material already existing on record or by the assessee choosing to adduce fresh evidence during the course of penalty proceedings. If the assessee does not choose to adduce fresh evidence or produce fresh material it is still open to him to show and prove that on the existing material itself the presumption raised by the Explanation would stand rebutted. They further held that penalty proceedings and assessment proceedings are quite distinct and separate from each other and the findings given in the assessment proceedings howsoever relevant or good they may be are not conclusive in so far as the penalty proceedings are concerned.
10. The learned counsel also referred to the latest Supreme Court decision in CIT v. Mussadilal Ram Bharose [1987] 165 ITR 14, where their Lordships considered the scope and ambit of the Explanation referred to above. It is significant that in the Supreme Court case the Full Bench of the Andhra Pradesh High Court in H. Abdul Bakshi & Bros.’ case (supra) was approvedly quoted. The Supreme Court held as follows :
Where the total income returned by the assessee is less than 80% of the total income assessed, the Explanation to Section 271(1)(c) of the IT Act, 1961, shifts the burden to the assessee to show that the difference was not owing to fraud or gross or wilful neglect on his part. This onus is rebuttable. If, in an appropriate case the Tribunal or the fact finding body is satisfied on relevant or cogent material on record and draws an inference that the assessee is not guilty of gross or wilful neglect or fraud then in such a case, the assessee cannot come within the mischief of the Section and suffer penalty. The burden placed upon the assessee is not discharged by any fantastic explanation nor is it a law that any or every explanation by the assessee must be accepted. It must be an explanation acceptable to the fact finding body.
11. The learned departmental representative while advancing able and thought-provoking arguments strongly defended the orders of the lower authorities and tried to convince us that the ratio of the Andhra Pradesh High Court in Burugupalli China Krishnamurthy’s case (supra) is no longer good law and he cited Addl. CIT v. Lakshmi Industries & Cold Storage Co. Ltd. [1984] 146 ITR 492 (All.) where it is held that even where the additions have been made to the returned income on the basis of an estimate, the explanation is attracted and penalty is leviable. The learned departmental representative argued on the basis of the abovesaid decision that simply because the disallowance was made on estimate basis it cannot be said that penalty provision in such an event is not attracted. He also cited Biland Ram Hargun Dass v. ITO [1984] 8 ITD 772 (All.) and argued that simply because the assessee had agreed that certain amounts were its income it cannot be said that no penalty can be imposed. Bach case has to be examined with reference to its own facts and circumstance attending the surrender that one can form a view as to whether it was an induced surrender meant to purchase peace rather than a voluntary or free disclosure of concealed income or a disclosure made by the assessee when it felt cornered and driven to the wall. The learned departmental representative vehemently argued that because the assessee was cornered and the revenue came into possession of unimbeachable evidence to prove the fact of concealment of real income and inflation of freight charges debited by the assessee in its books of account, the assessee is compelled to agree for sustaining the disallowance of Rs, 50 per lorry per trip and therefore it is an induced surrender but not a voluntary surrender. As per the decision cited penalty proceedings under 271(1)(c) do lie in the case of such an induced surrender. It is not in fact, a surrender made to purchase peace and tranquillity with the department but it is a surrender made as there is no other way out possible for the assesses and the assessee is cornered and thrown to the wall.
12. The learned departmental representative also cited before us Vishwakarma Industries v. CIT [1982] 185 ITR 652 (Punj. & Har.) (FB) where it was held that the intention of the Legislature in making-amendments to Section 271(1)(c) and in inserting explanation thereto was to bring about a change in the existing law. Consequently the ratio of Anwar Ali’s case (supra) which has considered the old Section 28 of the IIT Act, 1922, is no longer attracted for the construction of Section 271(1)(c) as amended, Therefore, it is sought to be argued by the learned departmental representative that the ratio of Anwar Ali’s case (supra), wherein it was held that the burden to prove conscious concealment on the part of the assessee is on the revenue does not appear to be good law. So also, he had cited CIT v. Nathu-lal Agarwala & Sons [1985] 153 ITR 292 (Pat.) (FB). The Patna Full Bench had considered the significance of the omission of word ‘deliberately’ from the wording of Section 271(1)(c) and insertion of explanation which is in vogue from 1-4-1964 to 31-3-1976. The Full Bench held that the omission of the word ‘deliberately’ from the wording of Section 271(1)(c) and inserting the Explanation thereto by Finance Act, 1964, was to bring about a change in existing law. Consequently, the ratio of Anwar All’s case (supra) which had considered the earlier provisions of Section 28(1)(c) of Indian Income-tax Act, 1922, is no longer attracted to the situation. The logical import of the explanation is to shift the burden of proof from revenue to the shoulders of the assessee. The explanation raises three rebuttable presumptions : (i) that the amount assessed is the correct income ; (ii) that the failure of the assessee to return the correct income was due to concealment of the particulars of his income and (iii) that such failure of the assessee was due to furnishing inaccurate particulars of such income. The onus to prove for rebutting the presumptions lies squarely on the assessee. However, the burden can be discharged as in civil cases by preponderance of evidence. Equally it may not be inflexibly necessary to lead fresh evidence and it would be permissible in the penalty proceedings of the assessee to how and prove that on the existing material itself the presumptions raised by the explanation stand rebutted. After reading the judgment of the Full Bench of Patna High Court we are unable to know whether there was any difference in enunciating the principles that should govern the imposition of penalty under Section 271(1)(c) existing between the Andhra Pradesh High Court in Burugupalli China Krishnamurthy’s case (supra) and the Patna High Court in Nathulal Agarwala & Sons’ case (supra). The learned departmental representative also cited before us C. Vasantlal & Co. v. CIT [1962] 45 ITR 206 (SC) for the proposition that the Income-tax Officer is not governed by any technical rules of the law of evidence and it is open to him to collect material to facilitate assessment even by private inquiry. But if he desires to use the material so collected, the assessee must be informed of the material and must be given an adequate opportunity of explaining. In pursuance of the authoritative pronouncement of the Hon’ble Supreme Court, in the above case, the Income-tax Officer though recorded sworn statements of the lorry owners by himself and also got the statements recorded through the Inspector gave adequate opportunity for the assessee firm to cross-examine them before using their evidence while framing the assessment. However, the assessee failed to avail the opportunity and did not choose to cross-examine any of them. The revenue examined not one or two persons but considerable number of lorry owners. The persons who are examined cannot be said to be biased. On the other hand, they were all impartial and believable persons. It is no doubt true that in every letter the assessee came forward with the plea requesting not to initiate penalty proceedings but the CIT Central did not accept or direct not to initiate penalty proceedings. The original addition proposed was Its. 41,40,452. The total of the agreed addition worked out to only Its. 6,81,960. At pages 29 and £0 of the second paper book filed on behalf of the assessee it can be seen that the assessee was duly intimated by means of the draft order that the revenue is going to initiate penalty proceedings under Section 271/274 for concealment of income. However, no serious objection was taken before the IAC. The learned departmental representative also brought to our notice the decision of the Andhra Pradesh High Court in CIT v. Angara Satyam [1959] 37 ITR 230 and Mathura Prasad Agarwal v. CIT [1977] 108 ITR 370 (SC) and argued that even in the reassessment proceedings the assessee can be penalised for concealment of income in the return submitted in the original proceedings. He also argued that the revenue need not do anything accept to rely upon the findings given in the assessment proceedings. He also cited before us CIT v. E.V. Rajan [1985] 151 ITR 189 (Mad.) and submitted that the facts of that case are nearer to the facts of the present case. In that case also the primary book on which the concealment was detected was an Anamat book. However, the addition was made on an estimate basis. Held, the penalty based on the said estimate is valid. He argued that there is no agreement between the assessee and the department that the department is not going to start penal proceedings against the assessee. The department never gave an impression that they would not levy penalty. He had cited before us Banta Singh Kartar Singh v. CIT [1980] 125 ITR 239 (Punj. & Har.) at page 241 and argued that in order to substantiate the plea of the assessee that penalty cannot be levied because it had proceeded on the footing that the department gave an impression that no penalty proceedings would be started is not correct. In all such cases everything depends upon the terms of the agreement and the type of agreement which the assessee entered into with the department. Therefore, firstly, he argued that the department is able to prove that there is concealment of income on the part of the assessee and therefore the case is fully covered by the provisions of Section 271(1)(c). In case the Tribunal did not agree with him in that submission he contended that the case is covered by the Explanation to Section 271(1)(c). He strongly refuted the claim put forward on behalf of the assessee that the words put in brackets in the Explanation viz., ‘reduced by the expenditure incurred bona fide by him for the purpose of making or earning any income included in the total income but which has been disallowed as a deduction’ will not apply to the facts of the present case because the freight charges in this case represent the inflated expenditure which cannot be bona fide. Lastly, he argued that no pains taking effort was undertaken by the assessee to explain that it was not guilty of any concealment. The explanation offered was very very general and bald and therefore it is a fit case where penalties sustained should be confirmed.
13. In reply the learned counsel for the assessee submitted that he filed his objections to the draft assessment order for assessment year 1977-78 at page 119 of the second paper book. For assessment year 1978-79 the objections for the draft assessment order were filed and were furnished at page 83 in the second paper book filed on behalf of the assessee. For assessment year 1979-80 similar objections were filed and a copy of which was furnished from pages 53 onwards of the second paper book filed on behalf of the assessee. He submitted that the assessee had gone in appeals against the assessments. The grounds of appeal for 1977-78 were furnished at page 103 of the second paper book. The grounds for assessment year 1978-79 were furnished at page 71 and the grounds for assessment year 1979-80 were furnished at page 41. In all the objections, as well in the grounds, the assessee had fully explained its stand. Further, at page 57 the assesses requested the department specifically that they have now come to the conclusion that it is worthwhile examining the lorry owners and drivers whose names are listed in the draft assessment orders at para 6.5 of the assessment order for 1979-80 and therefore they requested that an opportunity to cross-examine them may be given and they expressed their preparedness to pay necessary battas for summoning those people. However, the department did not concede the request of the assessee. Sri Prasad further submitted that a reading of the letter dated 9-3-1983 addressed by the CIT, Central, Karnataka, to Income-tax Officer, Central Circle, Vijayawada, would reveal that he had accepted the explanation offered on behalf of the assessee firm totally and in all respects. The addition was made only according to the directions of the CIT, Central. The learned CIT, Central, did not touch upon any pieces of evidence disclosing concealment. It is argued that when addition was made on agreed basis no penalty can be levied and for that proposition he relied on CIT v. Mansa Ram & Sons [1977] 106 ITR 307 (All.). When the addition was made to the total income on the assessee agreeing to the same and when no independent evidence was available to establish that his income was concealed penalty cannot be imposed and for this proposition the learned counsel for the assessee relied upon the decision of the Punjab and Haryana High Court in Sohinder Singh & Bros. v. CIT [1980] 121 ITR 834.
14. Thus, we have heard the arguments advanced on both sides and also had gone through the record of the case fully. The learned departmental representative Sri N. Santhanam was fair enough in supplying us the confidential file relating to these matters at our request. After having considered the whole matter, bearing in mind the principles of law, which are to be applied while appreciating the real point in controversy, in such cases, we feel that the assessee is not faulty of any concealment, much less, deliberate or conscious concealment. Further, the Explanation does not come into operation as we are of the opinion that the disallowed expenditure was bona fide incurred by the assessee though it was disallowed by the ITO for purposes of assessment. We are also bound to follow the law laid down in Burugupalli China Krishnamurthy’s case (supra) as well as the Full Bench decision in H. Abdul Bakshi & Bros.’ case (supra) which was approved by the Hon’ble Supreme Court in Mussadilal Ram Bharose’s case (supra). We may elaborate our conclusions by the following reasoning.
15. Firstly, the search and seizure operations conducted in the premises of the Managing Director of KCP Ltd. yielded unaccounted cash of Rs. 6.7 lakhs which he had surrendered as his income from ‘other sources’ on which he had paid tax also. Appraising on this aspect the Deputy Director of Inspection (I Madras) in his appraisal report dated 14-2-1980 observed :
The search has not brought to light clinching evidence to show that this unexplained cash sprung out of the inflated transport charges.
This would show that no direct nexus between the unexplained cash which was unearthed by search and seizure operations and the alleged kickbacks received from the assessee-firm which must have been the result of the inflated freight charges was established at all. It is significant to note that search and seizure operations were also conducted against the assessee-firm and its partner Shri M.C. Shah did not yield any fruitful information nor did it point out any hidden assets. In fixing the inflation in the hire charges actual freight was per market rate per lorry was taken into account. However, the assessee paid lorry hire on the basis of number of bags loaded in the lorry employed for transporting. In determining the actual freight rates reliance was placed mainly on the oral evidence gathered from lorry owners who plied their lorries for transporting sugar for the assessee firm from Vuyyur and Chagallu to Vizag.
16. Now let us examine the evidence of these lorry owners. It is significant that out of several lorry owners examined only one Sri Jalluri Pullaiah maintained account books. Others did not maintain any account books and they have stated only from their memory. The statements obtained from lorry owners by the Inspector were provided at pages 110 to 121 of the first paper book and the sworn statements recorded from 8 lorry owners were provided at pages 89 to 105 of the first paper book and sworn statements recorded from Sri J. Pullaiah besides being a proprietor of a lorry is also a partner in a firm called M/s. Kiran Lorry Transport. He is an income-tax assessee and maintains books of account. He owns two lorries bearing APB 9028 personally and AAK 7387 owned by his firm. He deposed that on 1-3-1977 transport charges paid by the assessee firm for his lorry AAK 7387 was only Rs. 500 and not Rs. 841.75. The amount received was credited in the day book of M/s. Kiran Transport Co. vide page No. 48. Admittedly, no proper inquiry was made into the truth of the entries found either in hie account books or in the account books maintained by the firm in which he is a partner, inasmuch as, the assessment against him and his firm was completed only Under Section 143(1) and not under Section 143(3). According to his deposition Sri N. Krishna, Sri Appa Rao and Sri Shaik Bade Mian were the drivers who drove the vehicles. He was examined by ITO on 26-11-1961. He clearly admitted in his statement that the lorry drivers collected the hire charges from the assessee company after signing. The assessee company did not give them copies on which the drivers signed. It is significant that none of these drivers who actually received the freight charges from the assessee firm were examined. Admittedly, this witness did not collect the hire charges directly from the assessee firm. The method adopted by the assessee firm was furnished before the CIT, Central. The assessee stated that empty lorries would be sent to the factory site and after the lorries are loaded with stocks goods despatch memos would be prepared by the assessee in respect of each lorry load containing particulars already referred to. On these despatch memos signatures of lorry drivers would be obtained. At the destination point they were unloaded and delivered to the clearing and forwarding agents who would give ‘goods received note’ to the driver and whosoever produces this ‘goods delivered note’ to the assessee firm would be paid the balance freight. In fact this version was spoken to by almost all the eight lorry owners who were examined by the Income-tax Officer on oath. For instance, Sri A. Madhava Rao, one of the lorry owners, stated that his driver was one P.V. Ratnam, that the practice in those days was to claim lorry freight charges on a slip of paper which would be surrendered soon after unloading the sugar, Sri N. Mohan Rao admitted that his lorry was employed to transport sugar. The goods despatch memo shown to him bears the signature of his cleaner K. Goverdhan Raju. In the goods despatch memo against the column ‘driver’ the signature of K. Venkateswara Rao was found. No doubt, he was his driver but he asserts that his signature must have been obtained on a blank memo. Again one T. Venkat Rathaiah also admitted that the signature of his lorry driver was taken on blank paper without filling in the details. Secondly, none of the lorry owners examined preserved their trip sheets except one K. Seetharamaiah. S/Shri L.S. Anjaneyulu and L. Nageswara Rao were two drivers who were engaged by him during those days. It is significant that the Income-tax Officer had seized trip sheet book from this witness maintained for the period from 12-12-1975 to 3-2-1977. It would have disclosed what was the charged freight for transporting the goods. However, this important piece of evidence was not produced by the department though admittedly it was in its possession. It is also significant that none of the lorry owners claimed to have received freight charges directly from the assessee firm. It is therefore claimed that their drivers used to get the money from the assessee firm. None of the drivers were examined. It is not the case of the revenue that the drivers who were employed and who have transported the goods during the relevant period were not available or their whereabouts are not known. In fact they are best persons to be examined and they are the persons who are competent to say whether the signatures bearing on the goods despatch memos belong to them or not. No attempt was made by the revenue to examine them. The transaction took place in the accounting years relevant to 1975-76 to 1979-80 whereas they were examined on oath long after the event. No doubt the Lorry Owners Association suggested to charge Rs. 3 per mile for 9 ton lorry. But it is only a suggested rate and it is admitted that the owners themselves did not strictly follow the said rate and they used to go according to their convenience. As the evidence of the so called lorry owners was not direct evidence and many of them did not maintain any account books their evidence can be of little or of no credit whatsoever. Even assuming for a while that the lorry freight given to the lorry engaged in transporting sugar under these two contracts was felt to be more the assessee offered the explanation as to under what circumstances it had to pay more towards freight. Firstly, it had stated that gathering 60 to 70 lorries at a time on a short notice and sending sugar by those lorries entailed very often that the said lorries would return empty in the return trip. Therefore the lorries used to charge 1 1/2 times than in the ordinary circumstances. The truth or otherwise of this allegation was never gone into by the revenue. Further, two comparable cases were cited. One is that of M/s. Coromandel Fertilizers. According to the revenue the said company used to send its fertilizers to each and every point in Andhra Pradesh and the rate of transport worked out to be far less than what is paid by the assessee firm. The assessee explained that M/s. Coromandel Fertilizers has got an advantage by having its factory at Visakha-patnam which is a terminal point and port town. All the goods-vehicles which transport cargo and unload it at Visakhapatnam would all be available and in fact would be eager to get loads from Visakhapatnam in their return trips. At this point M/s. Coromandel would be in a more advantageous and bargaining position and it would be but natural to get lorries for lesser rates whereas that cannot be said of assessee firm. Time was the essence of the contract and there were instances when the assessee had paid damages of Rs. 20,000 for non-delivery of sugar in time. As regards M/s. Challapally Sugars Ltd. is concerned, it is stated that that is not a comparable case, inasmuch as the quantity transported by the said factory to Visakhapatnam port is a very small quantity and the number of lorries used to be less. In our opinion, the assessee was able to establish from the evidence which is already on record that the so called comparable cases are not comparable at all and that the evidence recorded from the lorry owners did not carry any weight and did not establish concealment by the assessee at all. As far as J. Pullaiah is concerned he may be interested to see that he is assessed for lesser income than what he derived and there is every possibility for short crediting the amounts received towards freight charges. As regards other lorry owners they did not maintain any account books whatsoever.
17. At page 57 of the second paper book filed on behalf of the assessee which is part of the objections filed by the assessee for the draft assessment orders for assessment year 1979-50 the following is stated :
But however we have now come to the conclusion that it is worthwhile examining these owners and drivers whose names are listed in the draft assessment order at para 5.5. We therefore request you to kindly give us an opportunity to cross-examine them and we are prepared to pay the necessary battas for summoning these people.
The above would clearly prove that while finalising the assessments even an opportunity to cross-examine these lorry owners from whom the statements and sworn depositions were recorded was prayed for. However, their request was not conceded. According to us it is against principles of natural justice and according to the Supreme Court case cited already the statements of the lorry owners cannot be used for any purpose whatsoever inasmuch as no fair opportunity was given to the assessee to cross-examine these witnesses.
18. Assessment proceedings are quite different and independent proceedings than the penalty proceedings. The letter of the learned CIT, Central, Bangalore, dated 9-3-1983 clearly show that his directed addition of Rs. 50 per lorry per trip was based only on the statements of these lorry owners. No other aspect was considered by him as sufficient to sustain the addition suggested by him We have already held that the statements of lorry owners cannot be made use of in any way, and, therefore, according to us even the assessment proceedings are vitiated for violating the principles of natural justice. However, we are not going to determine the assessment proceedings as such. We are determining the penalty proceedings. It is no doubt true that according to the decided case law the findings given in the assessment proceedings though not conclusive is relevant piece of evidence. However, when some of the findings of the assessment proceedings are illegal those findings cannot even serve as strong pieces of evidence in penalty proceedings. Therefore, what follows is that there is no evidence on record to show that the freight charges given and recorded in the accounts of the assessee firm are either false or concocted or deliberately inflated. Consequently we have to hold that before applying the Explanation to Section 271(1)(c) and before arriving at the total income the addition made towards inflated freight charges should be taken out and the remaining income out of the assessed income only should be treated as correct income. We may also mention here that the Explanation governs only the appeal for assessment year 1975-76 and for the other assessment years it has no relevance. At pages 32-34 in pursuance of the notice under Section 148 the assessee firm returned an amount of Rs. 97,890 on 16-8-1979 as its income for assessment year 1975-76. The inflationary freight charges added to the returned income were Rs. 1,43 400 and the total income assessed was Rs. 2,41,290. If the inflationary freight charges were taken out while computing the correct income then the difference between the returned income and the assessed income would not be less than 80% and therefore the case does not fall or was governed by the Explanation to Section 271(1)(c).
19. The question whether there is conscious concealment on the part of the assessee for assessment year 1975-76 would be considered along with the said contention of the learned departmental representative for the other four assessment years also. As far as facts are concerned whatever we hold for assessment year 1975-76 equally applies to the other four assessment years with which we are concerned in these appeals. As far as the legal position is concerned we may mention that penalty proceedings are in the nature of penal proceedings, that the ratio of the Anwar All’s case (supra) and Khoday Eswarsa & Sons’ case (supra) already referred to supra still holds good, the burden lies on the revenue to prove certain receipt in the hands of the assessee is its income and that it is bound to prove the conscious concealment of income on the part of the assessee. “At page 333 in Burugupalli China Krishna-murthy’s case (supra) their Lordships followed a still earlier Division Bench decision in Kodurl Papa Rao’s case (supra) where it is held as follows :
Where there is no positive evidence warranting the inference that the disputed amount was concealed income of the assessee or that he had deliberately furnished inaccurate particulars of his income, no penalty is exigible… Findings arrived at by the income-tax authorities in the assessment proceedings for the determination or computation of tax are not conclusive for the purpose of levying penalty although they may be good evidence. However, penalty cannot be levied solely on the basis of reasons or findings given in the assessment proceedings.
This ratio is fully endorsed in Burugupalli China Krishnamurthy’s case (supra). It is significant in this case, time and again, it is asserted by the assessee that the freight charges paid by it are genuine and true but they have admitted to the suggested addition of Rs. 50 per lorry trip in order to purchase peace with the department. The proposed addition by the Income-tax Officer was more than Rs. 40 lakhs on which the tax payable both by the firm and partners was more than Rs. 30,00,000 whereas the assets of the firm were only estimated at less than Rs. 1,69,600. In those circumstances as the partners of the firm are still to carry on their business and as they would not be in a position to carry out such business if they are entangled in protracted proceedings before the income-tax authorities, we feel that under the facts and circumstances of the case, the assessee firm bona fide agreed to purchase peace with the department by agreeing to an addition of Rs. 50 per lorry trip. We are unable to agree with the learned departmental representative’s contention that because the assessee firm was cornered and driven to the wall they came forward with a proposal for agreement to suffer some addition towards lorry freight. Under the circumstances, the case law cited by the learned departmental representative on this point is not relevant. Suffice it for us to record that the whole documentary evidence and the ratio of the case law of the several decisions cited before us made us hold that the department has miserably failed in establishing that the assessee has consciously concealed its income by inflating the figures of lorry freight charges paid during the accounting years relevant to these five assessment years under consideration before us. Therefore, no concealment much less conscious concealment is proved. On the other hand, the evidence already on record would prove that the assessee might have recorded correct lorry freight charges. Hence, according to us, there is no justification to sustain the penalties for any one of these assessment years. Therefore, they are cancelled and these five appeals are allowed.