ORDER
T.V. Rajagopala Rao, Judicial Member
1. This is an assessee’s appeal relating to assessment year 1979-80 directed against the order of the Appellate Assistant Commissioner, B-Range, Hyderabad, dated 21-3-1988 confirming levy of penalty under Section 271(l)(c). Few facts relevant for our purpose may be stated as follows.
2. The assessee is a registered firm of three partners. For assessment year 1979-80, it had filed its return on 2-7 1979 declaring an income of Rs. 42,320. While completing the assessment, it was found that the assessee had not accounted for the credit note for an amount of Rs. 21,701 of M/s Texmo Industries. When asked to explain, the assessee stated that the amount was taken to the Sales account in the subsequent year and that the basis for claiming the amount of liability for assessment year 1979-80 will be explained if necessary. On 25-2-1982, the assessee filed a letter according to which it had agreed to an addition of Rs. 21,701 to be made to the income returned by it for assessment year 1979-80, by deleting the same from the returned income for assessment year 1980-81. It was also stated that the accounts were not settled with the dealer during the year under consideration and it was a hona jide mistake. This explanation of the assessee was found to be unconvincing and the Income-tax Officer in the penalty proceedings under Section 271(l)(c) held that when it was a bona fide mistake there was no necessity for the assessee to change the normal nature of accounts from Credit Note Account to Texmo Industries account in the statement filed before the ITO. If the accounts were not settled during the year of account, the assessee could have filed copies of the credit notes on the basis of which it had made entries in its books to show that the credit was contingent or subject to confirmation. In the absence of any evidence in this regard, the only conclusion which can be drawn is that the assessee wanted to postpone this receipt of income as a trading liability. In view of assessee’s admission by its letter dated 25-2-1982, the amount of Rs. 21,701 was added to the returned income. Notice under Section 271(l)(c)/274 was issued to the assessee to show cause as to why penalty should not be levied under Section 271(l)(c). In response, the assessee stated that the addition was made on an agreed basis. There was no intention on its part to avoid liability and it was prevented by sufficient cause in not returning the said income of Rs. 21,701 as part of the income earned by it for assessment year 1979-80. The ITO was not able to agree with these contentions of the assessee and levied a penalty of Rs. 12,182 under Section 271(l)(c) by his penalty order dated 6-3-1984.
3. Aggrieved against the penalty levied, the assessee went in appeal before the Appellate Assistant Commissioner, B-Range, Hyderabad. Before the AAC, it was submitted that on 2-7-1979, the Income-tax return was filed disclosing only an income of Rs. 42,320 and for assessment year 1980-81, the IT return was filed later showing an income of Rs. 27,805. The ITO noticed that an amount of Rs. 21,701.23 was shown as liability in the balance-sheet relating to assessment year 1979-80, when in fact it represented the amount of certain credit notes issued to the assessee. The assessee revised its return of income for 1979-80 to include the amount of credit notes and filedareturn showing an income of Rs. 69,121 and for assessment year 1980-81, the income was reduced and a revised return was filed showing an income of Rs. 6,760. Because the assessee did not show the amount under the credit notes in the income for assessment year 1979-80, penalty proceedings were initiated. It was the claim of the assessee before the ITO that the default was not intentional and since the addition was on agreed basis, no penalty should have been imposed. The same arguments advanced before the ITO were repeated before the AAC. Before the AAC also, it was stated that the assessee was selling certain goods manufactured by Texmo Industries. In fact, the assessee-firm was the authorised dealer at Karimnagar for the products of Texmo Industries, manufacturers of electric motors, pumps and pump-sets having their Head Office at Coimbatore and branch office at Secunderabad. During the accounting year relevant to assessment year 1979-80, the assessee received two credit notes from Texmo Industries both dated 31-3-1978, representing 4 per cent after sale service allowance. The amounts of the credit notes are the following:
Date Particulars Amount Rs.
31-3-1978 After sale service allowance allowed 21,043.16
on Rs. 5,26,079 at 4 per cent for the
year 1977-78
31-3-1978 Bonus discount allowed @ 6 per cent 658.07
on Rs. 10,967.80 on the sales of 13
Nos. Motors and 4 Nos. pumps, for the
period 1-4-1977 to 31-3-1978
Total 21,701.23
It is explained by the assessee that the Accountant entered the credit note amounts in the Credit Notes account. Subsequently it was realised to be an error and to rectify that error, the Sales account was credited with the credit note amount on 19-10-1979. This explanation of the assessee was found to be not acceptable by the AAC. He held that the quantum of the credit notes and the date on which the entries were made indicate that this was not merely an accounting error. The amount of credit notes indicates that the partners must have been aware of them. The credit note amount was reflected in the balance-sheet and also shown as profit for the next year only with a view to reducing the tax liability for, if it was shown and included in the income for assessment year 1979-80, the taxable income of the firm would have been substantial for assessment year 1979-80 and this would naturally have substantial effect on the tax liability of the partners. Under the facts and circumstances, the AAC felt that it was a fit case where penalty was attracted. He confirmed the ITO’s penalty order and dismissed the appeal filed before him. Aggrieved against the sustained penalty order passed by the AAC, the assessee filed the present second appeal before this Tribunal and thus the matter stands for our consideration.
4. We have heard Sri N.S.R. Anjaneyulu, learned counsel for the assessee, and Sri S.C. Jaini. learned Senior Departmental Representative, for the Department. Photo copies of the credit notes, both dated 31-3-1978, were furnished to us in a paper compilation filed by the assessee at pages 6 and 7. Another letter written by Texmo Industries to the assessee-firm dated 28-9-1978 was furnished at page 5 of the paper compilation. After going through the credit notes sent to the assessee-firm, both of them are found to be unconditional and the liability to pay the amounts covered by the credit notes was clearly admitted by Texmo Industries as well as by Aqua Pump Industries who are the distributors of Texmo Industries at Secunderabad. It is the case of the assessee that after sending the credit notes, M/s Texmo Industries received some complaints from the ryots of the locality in which the assessee sold engines, pumps and pump-sets of Texmo make and on receipt of those complaints, Texmo Industries had written to the assessee intending to withdraw the credit notes previously sent. In support of this contention, the assessee filed the letter dated 28-9-1978 which is as follows:
We are giving ‘After Sales Service Allowance’ to all our dealers to enable them to supply correct Pumpset to the farmer and also to provide after sales services like supply of spares, free replacements etc., at least .for a period of One Year (Guarantee period).
Recently we have received some complaints from your area farmers about non-providing of required services from your end.
We once again like to bring it to your notice that we give ‘After Sales Service Allowance’ only to make our dealer provide required services to his customers. Otherwise the same allowance will be withdrawn.
This letter nowhere indicates that the credit notes which were sent to the assessee were intended to be withdrawn or were actually withdrawn. A fair reading of the letter would show that it was only a threat administered by the manufacturer so that the dealer would supply spares and free replacements throughout the guarantee period of one year to the customers of Texmo products. When once a credit note is given and when it is unconditional and absolute in terms, to our understanding the person who sends the credit note cannot withdraw the same subsequently. If so, there is no reason why the amounts covered by the credit notes should be deleted from the income of the assessee-firm and should be shown as sales in the subsequent assessment year, viz., 1980-81.
5. During the course of the proceedings before this Tribunal, our attention was drawn to the order sheet entries of the ITO dated 9-2-1982 and 11-2-1982 as well as 25-2-1982 which are as follows :
Order sheet dated 9-2-1982:
An amount of Rs. 21,043.16 is credited to Credit Notes account and debited to Texmo Industries. Similarly Rs. 658.07 is credited to Credit Notes account and debited to Aqua Pump Industries. Assessee to prove liability. Adjourn to 11-2-1982.
Order sheet dated 11-2-1982:
It is explained that the amount of Rs. 21,701.23 credited to Credit Notes account and shown as liability outstanding has been transferred to Sales account in the accounts for assessment year 1980-81 and that the basis for claiming the amount as liability for assessment year 1979-80 will be explained with necessary evidence. Adjourn to 25-2-1982.
Order sheet dated 25-2-1982 :
A letter has been filed agreeing for addition of Rs. 21,000.
The sequence of the order sheet entries extracted above would show that on 9-2-1982 as well as on 11-2-1982, the assessee has been contending before the ITO that the credit note amount does not represent its income and in fact it was its liability for assessment year 1979-80. However, this contention was given up only on 25-2-1982 under letter specifically addressed by the assessee to the ITO whereunder the amount was agreed to be added to the returned income of the assessee for assessment year 1979-80. Seeking to explain as to why the amounts covered by the credit notes were not shown as part of the income for assessment year 1979-80, the assessee assigned the following reasons :
(1) The amount shown in the credit notes was not received in Cash. It represented only an amount agreed to be paid by Texmo Industries to the assessee towards commission and allowance for after sales service to customers subject to the condition of production of satisfactory evidence before Texmo Industries regarding the actual delivery of goods to the customers and the service rendered after sale to the said customers.
(2) On the basis of the letter dated 28-9-1978 received from Texmo Industries, the assessee thought that if the stipulated condition was not fulfilled the credit notes were liable to be cancelled and that the benefit received, if any, in this connection was liable to be refunded to Texmo Industries.
Both the reasons do not appear to be bona fide beliefs entertained by the assessee. As already stated, the credit notes were unqualified. No conditions were stipulated on the fulfilment of which only the amounts can be realised from Texmo Industries and Aqua Pump Industries. The assessee did not commit anywhere that it had not fulfilled the conditions imposed by Texmo Industries to supply spares etc. to the farmers who purchased Texmo products, during the guarantee period of one year. In fact, Texmo Industries did not withdraw the whole or any of the amounts covered by the credit notes. Hence, it is not reasonable for the assessee to think that the amounts covered by the credit notes does not represent income and on the other hand it represents income coupled with a contingent liability.
6. The learned counsel for the assessee contended that the present case before us is not a fit case where penalty under Section 271(l)(c) can be justified, and he relied upon the following decisions:
(1) CIT v. Dajibhai Kanjibhai [1991] 189 ITR 41 (Bom.),
(2) CIT v. S. V. Angidi Chettiar [1962] 44 ITR 739 (SC),
(3) CIT v. Gurudayalram Mukhlal [1991] 190 ITR 39 (Gauhati).
The learned counsel contended that when an addition was made on an agreed basis, no penalty under Section 271(l)(c) can be imposed. On the other hand, the learned departmental representative contended that even on an agreed addition penalty can be imposed or sustained. In support of this proposition, he relied upon the following case law:
(1) Rathnam & Co. v. IAC [1980] 124 ITR 3762 (Mad.);
(2) Addl. CITv. E. Bhoopathy [1978] 113 ITR 188 (Mad.).
The learned departmental representative contended that it is not a case where it is only a slip or a mistake which made the assessee not to admit the amounts covered by the credit notes as part of its income for assessment year 1979-80. It had deliberately taken the stand for some time even before the ITO that the amount does not represent its income and it had got valid reasons to treat the amount covered by the credit notes as a liability in assessment year 1979-80. In fact, it had sought to explain how it is a liability. However, ultimately on 25-2-1982, after losing all hopes about the validity of its contention, having been cornered, the assessee was compelled to admit that the amounts covered by the credit notes are part of its income for assessment year 1979-80. The facts and circumstances clearly disclose that there is concealment of income by the assessee and so it cannot be taken to be an agreed addition. The nature of agreed addition should be that it should be agreed from the beginning as soon as it is pointed out by the ITO, which is not the case here. Therefore, this is a case where penalty is validly imposed and it should not be disturbed by the Tribunal.
7. After hearing the arguments advanced on both sides, we are of the view that the amount covered by the two credit notes both dated 31-3-1978 forms part of the income of the assessee for assessment year 1979-80. The assessee is a firm which maintains its accounts on mercantile basis. It does not maintain its accounts on cash basis. Therefore, the fact that it had not received the amounts under the credit notes in cash does not have any significance. Even an unconditional agreed liability amounts to income. However, the assessee tried to convince the ITO that it is only a liability or the amount covered by the credit notes would become income of the assessee only on fulfilment of certain conditions. A fair reading of the credit notes, whose copies are filed before us, would show that there is no room for any belief to be entertained by the assessee that the amounts under the credit notes would become income of the assessee only on fulfillment of certain conditions.
8. In S.V. Angidi Chettiar’s case (supra) the Supreme Court laid down the law that even after dissolution of a registered firm, penalty proceedings can be started under Section 28(c) of the Indian Income-tax Act, 1922, as if there was no dissolution of the registered firm by virtue of Section 44 of the Act. The fact that under Section 23(5) of the Act in the case of a registered firm tax is not payable by the firm itself does not prevent a penalty being imposed on the firm. This decision is neither here nor there for purposes of the appeal before us. We do not know in what way it will help the appellant or support any of its contentions put forward before us. We hold that this decision cannot be of any help to the assessee.
9. The decision in Gunidayalram Mukhlal’s case (supra), also does not help the assessee. It deals with the erstwhile Explanation under Section 271(l)(c) when the returned income is less than 80% of the assessed income. In that case, certain cash credit was disbelieved by the Revenue and the amount was added as undisclosed income of the assessee. Evidence regarding cash credit was produced before the Tribunal in quantum proceedings but not admitted by the Tribunal. The Revenue did not adduce any evidence in penalty proceedings to prove that the amount represented assessee’s income. Under the circumstances of the case, the High Court held that there was no justification for imposing penalty under Section 271(l)(c). It can be seen that in that case there was plausible evidence to prove that the cash credit sought to be added to the income of the assessee was in fact a genuine cash credit and in fact evidence was adduced before the appellate authorities in quantum proceedings by the assessee. However, no contra evidence was led by the Revenue which would justify that the cash credit amount represents income of the assessee. In these circumstances, the evidence of the assessee that the cash credit was true was held to have rebutted the presumption raised under the erstwhile Explanation under Section 271(l)(c). However, that is not the case here. The amount under the credit notes was admitted to be the income of the assessee relating to assessment year 1979 80. There is no dispute about it and, therefore, the ratio of the Gauhati High Court in the above case does not help the assessee at all.
10. In Daljibhai Kanjibhai’s case (supra) the Bombay High Court held as per the head note of the decision at page 263 as follows :
Power to impose penalty under Section 28 of the old Act corresponding to Section 271 of the new Act depends upon the satisfaction of the ITO in the course of proceedings under the Act. It cannot be exercised if he is not satisfied and has not recorded his satisfaction about the existence of the condition specified in clauses (a), (b) and (c) before the proceedings are concluded. There is no evidence on record to show that the ITO, in this case, was satisfied in the course of assessment proceedings. Therefore, it must be held that the penal provisions of Section 271(l)(c) were not attracted in this case.
According to the assessee, no satisfaction of the ITO was recorded in the assessment proceedings about the existence of the conditions specified in Section 271(l)(c). That means, according to the assessee, that the ITO did not record a finding that the assessee has either concealed the particulars of his income or furnished inaccurate particulars of such income, while computing the assessment proceedings. This contention does not appear to be well founded on facts. Though the ITO did not record the very wording employed in Section 271(l)(c), when the gist or meaning of his order amounts to recording a finding that the assessee either concealed particulars or furnished inaccurate particulars of his income, the requirement of Section 271(l)(c), according to us, is met with and satis fied.The assessment order dated 27-2-1982 was filed before us. It contained the following finding of the ITO:
If the accounts were not settled during the year under account, the assessee could have filed the copies of the credit notes on the basis of which he made entries in the books to show that the credit was contingent or subject to confirmation. In the absence of any evidence and having regard to the usual commercial practice, the only conclusion that can be drawn is that the assessee wanted to postpone this receipt of income nature as a trading liability. In view of the assessee’s admission by letter dated 25-2-1982, an amount of Rs. 21,701 is brought to charge under the head Business.
Thus, the ITO gave a finding that the assessee tried to furnish inaccurate particulars of its income and by acting upon the admission contained in the letter dated 25-2-1982, the ITO also appears to have recorded that the assessee had also tried to conceal its income previous to the filing of the letter. Thus, the ratio of the Bombay High Court is fully complied with and the penalty order does not suffer from any infirmity in that regard.
11. Now, the question that remains to be seen is whether any penalty under Section 271(l)(c) can be sustained when an addition is made on agreed basis. We have already explained what is meant by “agreed addition”. We agree with the contention of the assessee that when a defect is pointed out and the explanation of the assessee is sought for, if the assessee comes forward and admits the defect as a mere mistake, slip or omission, and surrenders the amount at the earliest possible time available to him, there may be some scope to entertain the view that the addition is on agreed basis. “Agreed basis” in our opinion should be “immediately agreed upon” and should not represent an amount surrendered ultimately when there is no other go left for the assessee but to surrender.
12. In Rathnam & Co.’s case (supra), while completing the assessment for 1963-64, the assessee company had agreed for an addition to the low gross profit disclosed. The penalty levied under sec tion271(l)(c) for 1963-64 was also sustained by the Commissioner of Income-tax to whom a revision had been filed. Against the revisionary order passed by the CIT, writ petition was filed in the High Court of Madras to quash the order of penalty. The question was whether under the facts and circumstances penalty can be levied. Dismissing the writ petition filed before it, the Honourable Madras High Court held the following as per head note at page 377:
Held, (i) that there was nothing on record to show that the assessee agreed to the additions made on condition that no penalty should be levied; even otherwise, the applicability of Section 271(l)(c) did not depend on the consent or otherwise of the assessee;
(ii)that the inference drawn by the 1TO and the Commissioner that the petitioner should be taken to have deliberately concealed the particulars of his income by his conduct in agreeing to the addition being made to his income was justified;
(iii)that the penalty levied was, therefore, justified.
In this case also, the letter dated 25-2-1982 contained an admission surrendering the amount covered under the credit notes as part of the income of the assessee for assessment year 1979-80. The admission or surrender of the amount was unconditional and it was not made on any condition that penalty should not be levied. The Madras High Court categorically held that the applicability of Section 271 (l)(c) did not depend upon the consent or otherwise of the assessee.
13. In E. Bhoopathy’s case (supra), for assessment years 1963-64 to 1965-66, the assessee estimated his income at 15% of the turnover which was not accepted by the ITO who had assessed 20% of the estimated turnover as representing the income of the assessee. The assessee accepted the addition made by the ITO. Penalties were levied by the IAC which were cancelled by the Tribunal. On a reference to the Madras High Court at the instance of the Department, the Honourable High Court held the following as per head note obtaining at page 189 :
Held, that the Tribunal had not applied its mind properly to the facts of these three assessment years. The Income-tax Officer had only made an estimate on the basis of the turnover of each of the years. He had to make the estimate as the assessee did not produce any accounts for these years. The assessee himself having accepted the estimate of 20 per cent made by the officer and not having been able to show that the estimate made by him was bona fide or proper, there is clear scope for the finding that the assessee has concealed the particulars of his income or filed inaccurate particulars thereof in these three years and the difference between the assessed income and the returned income would represent concelament and hence the levy of penalty was justified.
The above would show that penalty proceedings can be Initiated and penalty can be sustained even with regard to agreed additions made in the assessment proceedings.
14. In view of the Madras High Court decisions quoted above, the argument of the learned counsel that penalty cannot be sustained on agreed addition cannot be taken as a correct legal concept.
15. Having regard to all the above, we have to hold that there is clear concealment on the part of the assessee In not disclosing an amount of Rs. 21,701.23 as part of its income for assessment year 1979-80 or to that extent the assessee furnished inaccurate particulars of its income for assessment year 1979-80. The assessee also admitted that the said amount represented its income for assessment year 1979-80. The penalty imposed by the ITO is clearly sustainable. We find no ground to interfere with the orders of the lower authorities.
16. The appeal fails and is dismissed.
