ORDER
Per Sri G. Santhanam, Accountant Member – This is an appeal by the assessee against levy of penalty under sec. 271(1) (c) of the Income-tax Act, 1961.
2. The following credits were added to the income of the assessee for assessment year 1980-81 and the same were confirmed by the Tribunal :
Name of the creditor
Amount
Rs.
Sri K. Ramaiah
10,000
Sri B. Harinarayana
12,000
Sri G. Satyanarayana
15,000
On the basis of the assessment, proceedings under sec. 271(1) (c) were initiated and a penalty of Rs. 40,000 was levied which on appeal was confirmed by the Commissioner of Income-tax (Appeals).
3. Sri M. J. Swamy, learned counsel for the assessee, submitted that the credits were all genuine and the mere fact that the assessee was visited with adverse findings in the quantum proceedings cannot be the basis for the levy of penalty. It is not doubt true that the onus is on the assessee to prove the genuineness of the credits in assessment proceedings. However, penalty proceedings are distinct and different and it is for the revenue to prove that the assessee did not give any explanation or that the explanation given was false or that the assessee was unable to substantiate the explanation offered by him in respect of the credits. None of the ingredients an necessary for the levy of penalty has been established by the Income-tax Officer except his reliance on the findings in the quantum proceedings. For one thing, the enquiries were conducted behind the back of the assessee and particularly the income-tax Inspectors report dated 15-3-1983 was never put to the assessee. However, the creditors themselves filed either letters or affidavits in the course of the assessment proceedings. Sri K. Ramaiah in his sworn affidavit had affirmed the advance made to the assessee and had explained the sources of his income and has also stated that the statement given before the Income-tax Inspector to the effect that he did not make the advance was one made out of fear to tax liability. The Income-tax Officer called upon the assessee to produce the creditor for examination but the assessee was unable to produce him and, therefore, the Income-tax Officer drew an adverse inference against the assessee. Now, in this case, the existence of the creditor cannot be denied, because he was himself contacted by the Inspector at the address given. He had explained in the affidavit the reason for his denying the advance in his statement made before the Inspector and to that effect he had filed an affidavit. Though the assessee could not produce him for examination, the Income-tax Officer ought to have summoned him for examination before he drew an adverse inference especially when he has retracted the statement made before the Income-tax Inspector. Even though such a course had not been resorted to in the quantum proceedings, at least in the penalty proceedings he should have done it. This has not been done and, therefore, reliance on the findings in the quantum proceedings cannot be resorted to, more so when the assessee has substantiated his version about the creditor by the creditors own affidavit.
4. As regards Sri B. Harinarayana, Sri Swamy submitted that the assessee has filed a discharged pronote. The Income-tax Inspector has reported that the creditor owned about 7 cents of dry land and was running a small hull or mill. He was also in the habit of taking lands on lease and he was never in the habit of lending monies to others. All this information the Inspector had collected not from the creditor himself but from the Village Munsif who had issued a certificate to that effect. Thus, the Inspector himself had acted on hearsay evidence and the Income-tax Officer has based his conclusions on such flimsy material. Here also, the identity of the creditor is established. Even taking into account the Inspectors report for whatever it is worth, it is clear that the creditor is owing some dry lands and was cultivating tobacco on lands taken on lease. The mere fact that the assessee was unable to produce the creditor could not go against the assessee. On the other hand, the assessee had filed a discharged promissory note. The Income-tax Officers view was that the signature under date 27-9-1979 appeared to be very fresh and if that is so, he could have as well caused an examination to be made by the Examiner of Questionable Documents or hand-writing experts etc. Nothing was done, but still the assessee was made to take the odium. He submitted that if not in the assessment proceedings, at least in the penalty proceedings the Income-tax Officer ought to have taken steps because the burden was on him to prove that the assessee has not substantiated his explanation or that his explanation was false.
5. Sri Swamy further contended that Sri Harinarayana was examined by the Income-tax Officer, Karimnagar, within whose jurisdiction he was residing and before him he had confirmed the transaction. This fact was also overlooked by the Income-tax Officer.
6. As far as the credit standing in the same of Sri G. Satyanarayana is concerned Sri Swamy submitted that he denied having given any advance to the assessee in his statement made before the Inspector. When this was put to the assessee, the assessee produced a cash receipt for the payment of Rs. 16,010 (i. e. loan of Rs. 15,000 + interest) signed by one G. Ramesh on 11-2-1980, and this Ramesh was the creditors brothers son. Subsequently, an affidavit made by Sri G. Satyanarayana was filed by the assessees. In that affidavit, the creditor had confirmed the transaction and also explained that his denial of the transaction before the Income-tax Inspector was out of fear. This affidavit is dated 14-2-1984, made before and attested by a Notary Public. However, the Income-tax Officer felt that the signature in the affidavit was a forged one and on that basis he drew an adverse inference against the assessee in the quantum assessment in his order dated 21-4-1984 without examining the Notary Public or the creditor. Subsequent to the assessment, when the Income-tax Officer expressed a doubt about the genuineness of the affidavit given by Sri G. Satyanarayana, the assessee filed an affidavit on 18-4-1985 stating that if there was any difference in the signature, he was not responsible for the same and that it was entirely for Sri G. Satyanarayana to explain that and that Sri G. Satyanarayana had turned inimical to him and was trying to harm his interest. Further examination of the assessee was made on 12-3-1987 about the genuineness of the affidavit and the assessee had denied the allegations and had stated that as he was not a hand-writing expert, he could not vouchsafe for the signature of Sri G. Satyanarayana found in the affidavit. Even after this flat denial by the assessee in the course of the penalty proceedings, the Income-tax Officer had not chosen to refer the matter to a handwriting expert nor to summon Sri G. Satyanarayana. As a matter of fact, Sri Satyanarayana was a man of means and this fact was brought to the notice of the Income-tax Officer as early as 12-4-1984 by the assessee in his letter in which it was stated that Sri Satyanarayana was manufacturing cattle feed and poultry feed and was doing business in Nellore and Bellary districts, that he is a director of certain companies and that he owns a big poultry farm besides agricultural lands. No doubt, the assessee was put in the dock in his failure to produce the creditor in the quantum proceedings, but in the light of so much material giving credence to the explanation of the assessee that the credits were all genuine, it cannot be held that the explanation of the assessee was false or remained unsubstantiated. In fact, the onus squarely lies on the revenue to prove that the explanation was either false or unsubstantiated and this onus has not been discharged.
7. Sri Swamy further submitted that the assessee lost his case before the appellate authorities because the many facets of the case has not been brought before them. The assessment was based on surmises and half-baked evidence and that cannot be a valid ground for levying penalty merely because the assessee had lost the quantum appeal. He relied on the following decision :
State of Maharashtra v. Bhaishankar Avalram Joshi AIR 1969 SC 1302 at 1303; Mcleod & Co. Ltd. v. State of Orissa 1971 Tax LR 1656 (Ori.); T. M. M. Madalai Nadar & Co. v. CIT/CEPT [1956] 30 ITR 191 (Mad.) at 197; STO v. Uttareswari Rice Mills [1973] 89 ITR 6 (SC); CIT v. Rameshwar Dayal Ratanlal [1985] 156 ITR 411 (Pat.); Sri Sohan Lal Jain v. ITO [1986] 20 TLR 410 (Jp. – Trib.); Lalchand Bhagat Ambica Ram v. CIT [1959] 37 ITR 288 (SC) at 290; C. Vasantlal & Co. v. CIT [1962] 45 ITR 206 (SC) at 209; Addl. CIT v. Burugupalli China Krishnamurthy [1980] 121 ITR 326 (AP) CIT v. H. Abdul Bakshi & Bros. [1980] 160 ITR 94 (AP) (FB); Sir Shadilal Sugar & General Mills Ltd. v. CIT [1987] 168 ITR 705 (SC); Girdharilal Soni v. CIT [1989] 179 ITR 111 (Cal). and also the observations by Chaturvedi & Pithisaria on Income-tax (3rd edition) Vol. 3, pages 2805 and 2793 and Vol. 2 page 1960.
8. Sri M. K. Rao, learned departmental representative, submitted that the assessee has not proved the credits. The Tribunal has upheld the addition on the ground that the onus on the assessee was not discharged by him. This is good evidence for levy of penalty. The assessee has not adduced any fresh evidence in the penalty proceedings to rebut the presumption that was raised against him in the assessment proceedings. He referred to the order of the Tribunal in the quantum assessment and contended that none of the contentions of the assessee was accepted and, therefore, the explanation offered by the assessee can be said to be either false or unsubstantiated. It is not necessary for the Income-tax Officer to conduct further enquiries in the penalty proceedings; it is for the assessee to dislodge the inference by discharging the onus that got shifted to him on a result of the assessment proceedings. He relied on the following decisions :
CIT v. Durga Prasad More [1971] 82 ITR 540 (SC) and Oriental Wire Industries (P.) Ltd. v. CIT [1981] 131 ITR 88 (Cal.).
and the observations in Chaturvedi & Pithisaria (3rd edition), Vol. 5, pp. 4934 and 4935.
Thus he relied on the orders of the authorities below.
9. Having regard to rival submissions and the materials on record, we cancel the levy of penalty under sec. 271 (1) (c). All the three creditors are not bogus creditors; their identity was established because they have been contacted by no less a person than the Income-tax Inspector. It is true, two of them had denied having made the advance in their statement before the Inspector, but the result of the enquiry conducted by the Inspector was not put to the assessee. This is evident from the fact that whereas the Inspector had submitted his report on each one of the creditors on 15-3-1983, the Income-tax Officer had addressed a letter to the assessee on 5-3-1983 itself making a ague suggestion that his independent enquiries revealed that the credits were not genuine. The learned departmental representative submits that the Inspector, before submitting his report formally in writing at a future date, might have apprised the Income-tax Officer in advance of the result of the enquiries leading to the issue of such a letter on the part of the Income-tax Officer, and, therefore, there cannot be any grievance on the part of the assessee. Sri Swamy objects vehemently to this proposition and he is supported by the observations of the Honourable Andhra Pradesh High Court in Nagulakonda Venkata Subba Rao. v. CIT [1957] 31 ITR 781 at 787 :
“In our view the mere statement of the Income-tax authorities that on the enquiries instituted by the Income-tax Officer they were reliably informed that the assessee was not only in the habit of omitting transactions from his books, but was known to charge much higher rates of interest that the prescribed one, is not sufficient. It is not in the first place shown that the assessee was given an opportunity, nor is it sufficient to justify the assessment which not only does not furnish the basis on which the estimate is made but which, without doubt, can be said to be a guess.”
Thus, we uphold the contention of Sri Swamy in this regard.
10. But, that is not the end of the matter. The assessee had suo motu furnished an affidavit from Sri G. Satyanarayana in which he had retracted the statement made before the Income-tax Inspector. The Income-tax Officer wanted the assessee to produce the creditor but he was unable to produce him. There is force in the contention of Sri Swamy that in a situation where there are two conflicting statements from the same person, one before the Income-tax Inspector and another an affidavit sworn before Notary Public who is a public authority, and the assessee is unable to produce the person, the Income-tax Officer, before he draws an adverse inference, ought to issue summons on the person and examine him. This has not been done. The assessee had explained in his letter dated 12-11-1984 that Sri G. Satyanarayana is manufacturing cattle feed and poultry feed and was shifting between Nellore and Bellary districts and that he had obtained the affidavit dated 14-2-1984 before the Notary Public and Sri Satyanarayana had expressed his inability to appear in person before the Income-tax Officer. It still the officer persisted in his doubt, he ought to have issued summons at least under sec. 11 of the Income-tax Act, 1961. Instead, he was fastening the assessee with the burden of producing the creditor even though the assessee had expressed his inability frankly in his letter dated 12-11-1984. Therefore, the adverse inference drawn by the Income-tax Officer in his assessment order dated 21-4-1984 in respect of this creditor cannot be used against the assessee in the penalty proceedings. It would appear from the penalty order that the creditor, Sri Satyanarayana, denied having issued any affidavit and the affidavit filed by the assessee was a fabricated one, the signature of the creditor in the affidavit being a forgery. We do not know from what material such an inference was drawn against the assessee in the penalty order, except the averments to that effect in the order levying penalty. From the statements filed before us, it would appear that the assessee was examined by the Income-tax Officer on 12-3-1987 (pp. 8 to 10 of the paper book) and questions 7 to 10 and the answers thereto are as follow :
“Q7. G. Satyanarayana also denied having lent any money to you. Please explain ?
A. It is not correct. He has lent the money to me.
Q8. The signature of G. Satyanarayana in the sworn statement taken by the ITO on 15-3-1985 (which I am showing you) and in the alleged affidavit are at variance. Please explain ?
A. This matter I cannot explain as I am not an expert in hand-writing.
Q9. Do you admit my suggestion that the affidavit filed by you is a fabricated one and signature of G. Satyanarayana in the affidavit is forgery ?
A. No. I do not agree.
Q10. G. Satyanarayana has also stated that he never appeared before the Notary Public Bapatla to sign the so called affidavit. What do you say ?
A. I do not know. He has given himself the affidavit to my clerk who has handed over to me.”
In this context, another affidavit filed by the assessees clerk, one Karuparthy Rama Rao, before Notary Public on 18-4-1985, explaining the circumstances in which the affidavit from Sri G. Satyanarayana was obtained, is on record, In that affidavit, the clerk explained that he was asked by Sri Satyanarayana to wait in the lodge (where he was staying), that he would go to the Notary Public and obtain the affidavit. Later on, he asked the clerk to meet him in the evening and when he met him in the evening at the lodge, Sri Satyanarayana handed over the affidavit. The assessee also had furnished an affidavit on 18-4-1985 vouchsafing for his clerk meeting Sri G. Satyanarayana and obtaining the affidavit after some delay. He has also stated that the stamp paper for the document was not purchased by him. He has further averred that Sri Satyanarayana has turned inimical to him and was trying to harm his interest. When so much is told about the creditor and also in the context of the flat denial of forged signatures, it is incumbent on the Income-tax Officer to have summoned Sri Satyanarayana under the provisions of sec. 131 and obtained a statement on oath and examined him on oath with the right of cross-examination being given to the assessee. This course was not adopted by the learned Income-tax Officer, nor was the Notary Public before whom the creditor Sri Satyanarayana is purported to have made the declaration affirming the giving of the loan, examined by the Income-tax Officer. Therefore, we conclude that no advance inference can be drawn against the assessee in the penalty proceedings, the primary reason being that the Income-tax Officer has not discharged the onus on his part to say that the explanation offered by the assessee was false, or even to say that the assessee has not substantiated his explanation.
11. Now, we take up the credit of Rs. 12,000 standing in the name of Sri B. Harinarayana. Adverse inference was drawn in the quantum proceedings on a certificate issued by the Village Munsif to Timmididapadu on 4-3-1983 to the effect that Sri B. Harinarayana was never in the habit of lending monies to others. This was not even put to the assessee in specific terms. A discharged pronote was also produced and the Income-tax Officer in the assessment proceedings doubted the signature and thus the bona fides of the discharged pronote. The creditor was not produced before the Income-tax Officer. The assessee in his letter dated 12-11-1984 had stated that the person was cultivating tobacco in Gunturpalli, Mulugu Taluk, Warangal District, and has expressed his inability to come over to the office. Still no summons were issued to the creditor by the Income-tax Officer especially when he entertained doubts about the bona fides of the signature etc. in the discharged promissory note which was produced before him as a piece of evidence in support of the loan though in the face of the material it becomes all the more important for the Income-tax Officer to have summoned the creditor and verified the matters. This has not been done, either in the assessment proceedings or in the penalty proceedings. It would appear that the Income-tax Officer, Karimnagar, had examined Sri Harinarayana who had confirmed the advance before him.
12. From the records, it is seen that the Commissioner of Income-tax (Appeals) has remarked that there was an affidavit from Sri B. Harinarayana which was examined by the Government Examiner of Questioned Documents and that the signature appearing in the said affidavit was not of the alleged creditor. This is obviously a mis-statement of fact on the part of the learned first appellate authority, because Sri B. Harinarayana had not filed any affidavit. No reference to such an affidavit was made either in the assessment order or in the penalty order by the Income-tax Officer. Therefore, we do not find any material to sustain the observation of the CIT (Appeals) so far as the credit from Sri B. Harinarayana is concerned.
13. Lastly, we take up the credit of Rs. 10,000 in the name of Sri K. Ramaiah. Penalty is levied on the assessee for the reason that the addition was confirmed in quantum proceedings.
Sri K. Ramaiah, in his statement before the Income-tax Inspector, had denied having made the advance, but the statement was not put to the assessee in the course of the assessment proceedings. Subsequently, Sri Ramaiah gave an affidavit on 9-1-1984 affirming the loan. The assessee in his letter dated 12-11-1984 had stated that the creditor was growing cotton in Bellary area and that he would be out of station most of the time, and when the assessee had requested him to attend the Income-tax Officer, he had stated that as he had “to sell cotton and he could not afford to stay” and so gave an affidavit affirming the loan. Before the Income-tax Officer, there were two statement : one given before the Income-tax Inspector denying the advance, and another an affidavit solemnly affirmed before a Notary Public confirming the advance. There is also a letter from the assessee explaining his inability to produce the creditor. Natural justice demands that if the Income-tax Officer still persisted in his doubts about the genuineness of the credit, he ought to have summoned the creditor for examination and cross-examination. This has not been done. Whatever might have happened in the quantum appeal, it cannot be gainsaid that penalty proceedings are separate and district and it is for the Income-tax Officer to prove that the explanation offered was false or that the assessee was unable to substantiate his explanation. The Income-tax Officer did neither. Therefore, penalty cannot be sustained.
14. It was vehemently argued before us by the learned departmental representative that once an addition was made under sec. 68, the findings in the assessment proceedings are valid grounds and it is for the assessee to prove in the penalty proceedings that he is innocent. We do not subscribe to this view in the ratio of the decision of the Honourable Andhra Pradesh High Court in CIT v. H. Abdul Bakshi & Bros. [1986] 160 ITR 94 (FB). Additions under sec. 68 could be made when there is no explanation for the cash credit or the explanation offered by the assessee is found to be unsatisfactory by the Income-tax Officer. In such circumstances only the cash credits are deemed to be the income of the assessee. In the case cited, Explanation to sec. 271(1) (c) as it was in force with effect from 1-4-1964 to 31-3-1976, created a legal fiction of concealment with two presumptions, viz. (a) the amount of assessed income is the correct income and it is in fact the income of the assessee, and (b) failure of the assessee to return correct income was due to fraud or gross or wilful neglect on the assessees part. These presumptions are raised against the assessee by the Explanation as it stood prior to 1-4-1976, but of course the presumptions were held to be rebuttable. In other words, during the period from 1-4-1964 to 31-3-1976, the charge of concealment could be invoked against the assessee the moment the difference between the assessed income and the returned income exceeded 20%. The revenue did not have to do anything more except to point out to the difference. It is for the assessee to rebut the presumptions and then the burden would shift to the revenue to establish that the assessee had concealed the income. Even in such circumstances, it was held in that case that the letter of confirmation and sworn statements of creditors relating to the factum of lending the amounts constituted prima facie evidence having the effect of discharging the initial burden. The case before us is not governed by the Explanation as it stood before 1-4-1976. We have dealt with the provisions prior to 1-4-1976 only to underline the fact that confirmation letter and sworn statements would constitute good pieces of evidence for discharging the initial burden. With the serapping of this Explanation by Taxation Laws (Amendment) Act, 1975 (41 of 1975), it cannot be held that the amount added under sec. 68 on grounds of unsatisfactory explanation would automatically lead to the inference that there has been concealment of income. This conclusion we reach from an analysis of sec. 68 and Explanation 1 to sec. 271(1) (c) which are as follows :
“S. 68 Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Income-tax Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year”.
Explanation 1 to sec. 271(1) (c) :
“Where in respect of any facts material to the computation of the total income of any person under this Act, –
(A) such person fails to offer an explanation or offers an explanation which is found by the Income-tax Officer or the Appellate Assistant Commissioner or the Commissioner (Appeals) to be false, or
(B) such person offers an explanation which he is not able to substantiate,
then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed :
Provided that nothing contained in this Explanation shall apply to a case referred to in clause (B) in respect of any amount added or disallowed as a result of the rejection of any explanation offered by such person, if such explanation is bona fide and all the facts relating to the same and material to the computation of his total income have been disclosed by him.”
From a reading of these two provisions, it would be clear that if the assessee did not offer any explanation for credits appearing in his books of account, he will be caught both under sec. 68 and also within the mischief of Explanation 1 (A) to sec. 271(1) (c) on the mere ground that there was no explanation. However, if there is an explanation, additions can be sustained under sec. 68 if the explanation is not found to be satisfactory by the Income-tax Officer. For this reason alone no penalty can be levied, because Explanation 1(A) to sec. 271(1) (c) purposely uses the words “offers an explanation which is found…. to be false”. There is a long distance between an explanation remaining as unsatisfactory and an explanation being found to be false. Thus, while additions could be made on the basis of unsatisfactory explanation under sec. 68, penalty is not leviable for that reason unless it is shown that the explanation was false. Clause (B) of Explanation 1 to sec. 271(1) (c) deals with an explanation which is not substantiated by the assessee. This cannot be equated to an explanation found to be unsatisfactory by the Income-tax Officer as embedded in sec. 68. This is because clause (B) has to be read with the proviso thereto which makes it abundantly clear that no penalty can be levied under clause (B) of the Explanation if the explanation was a bona fide one and all fats relating to the same and material to the computation of the total income have been disclosed. To put it explicitly, one can visualise a bona fide explanation with the relevant facts being stated but still it was not to the satisfaction of the Income-tax Officer as a result of which addition under sec. 68, can be made, but on this ground alone no penalty is leviable in terms of Explanation 1(B) read with the proviso thereto. In the instant case, we are satisfied that the assessee had offered an explanation which was substantiated by sworn depositions or discharged promissory notes which were rejected by the Income-tax Officer without examining the deponent-creditors or the promisees or the Notary Public. So, this is simply a case of rejection of explanation though substantiated by the assessee.
15. For all these reasons, the penalty levied under sec. 271(1) (c) in respect of the additions substantiated by the Tribunal is vacated. The appeal is allowed.