TMI Blog1991 (1) TMI 196X X X X Extracts X X X X X X X X Extracts X X X X ..... als) and the CIT (Appeals) gave certain reliefs to the assessee. However, he confirmed the above-mentioned addition of Rs. 2,99,996. There was a further appeal to the Income-tax Appellate Tribunal by the assessee. The department had also filed an appeal before the Tribunal and the Tribunal had disposed of both the appeals by its order dated 5-4-1983 in I.T.A. No. 471 (Coch.) 81 and I.T.A. No. 515 (Coch.) 81. The income determined as per the order of the Income-tax Appellate Tribunal is Rs. 6,99,370. This is inclusive of the sum of Rs. 2,99,996 added to the assessee's income as commission receipts. 3. On the aforesaid facts, penalty proceedings under section 271(1)(c) were initiated by the Income-tax Officer. He issued a notice to the assessee. The counsel who appeared on behalf of the assessee contended before the Income-tax Officer that though the Appellate Tribunal has sustained an addition of Rs. 2,99,996 towards export commission account, the assessee is taking up the matter in reference to the High Court. He also contended that the taxability of this item, in any case, is not free from doubt and that there is no concealment involved attracting the provisions of section 271(1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Bangalore company and since the assessee's claim is not a genuine one, there is a clear case of concealment of income. He, therefore, levied a penalty of Rs. 2,50,000 under section 271(1)(c) of the Income-tax Act, 1961. 4. As against this order of the Income-tax Officer, the assessee went up in appeal before the CIT (Appeals), before whom the learned counsel for the assessee contended that the assessee firm received certain commission from Greaves International Ltd., but the amount of Rs. 2,99,996 so received was actually received on behalf of Hotel Winrace Pvt. Ltd., Bangalore, in which all the partners of the assessee-firm were shareholders. He further stated that the commission so received on account of the company was transferred on the last day of the previous year by a Journal entry to the account of Hotel Winrace Pvt. Ltd., Bangalore. It was also stated that since the four partners of the firm were the four shareholders of the company with equal shareholding, the amount was actually divided among the four partners of the assessee-firm and credited to their accounts as the firm did not have any direct transaction with the company and any account with the company. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent by the assessee-firm to its partners and, therefore, the payment is disallowable under section 40(b) of the Act. Relying upon the decision Calcutta High Court in the case of CIT v. Ananda Bazar Patrika (P.) Ltd. [1979] 116 ITR 416, at p. 424, he contended that since the penalty was not emanated from the satisfaction of the Income-tax Officer, no penalty is exigible in this case. He also relied upon the decision of the Allahabad High Court in the case of CIT v. Shadiram Balmukand [1972] 84 ITR 183 for the aforesaid proposition. He further relied upon the decision of Allahabad Bench 'A' of the Tribunal in the case of G.W. Lawrie Co. v. ITO [1983] 4 ITD 273 (TM), for the proposition that there is no bar for the commission being paid by the assessee-firm to its partners. 6. The learned departmental representative, on the other hand, contended before us that this is a clear case of concealment. According to him, the finding of the Income-tax Officer and the CIT (Appeals) is the same, inasmuch as, both have held that no commission was paid to Hotel Winrace Pvt. Ltd., Bangalore. The mere fact that the CIT (Appeals) has invoked the provisions of section 40(b) will not make his find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to Hotel Winrace Private Ltd., is not a genuine liability .......... In view of these facts and circumstances, the assessee's commission receipts during the year will be increased by an amount of Rs. 2,99,996.37 and this calls for an addition of Rs. 2,99,996." Now we will proceed to examine the finding arrived at by the CIT (Appeals), and the reasons given by him in arriving at that finding. This is found in para 5 of the CIT (Appeals)'s order in the quantum appeal, which is at pages 20 21 of the paper book filed by the assessee. The relevant portion extracted from para 5 of the CIT(Appeals) order is reproduced below : " In this case though the amount is said to have been paid to a limited company, the Income-tax Officers' finding is that this commission has been ultimately divided by the four partners of the firm themselves. It is not as if the amount has become the income of the limited company. Therefore, apparently, the contract cannot be said to have been that of the limited company. Further, Shri Felix who was the Managing Director of the limited company, is claimed to be the person who has direct contact with the export houses. Shri Felix is a partner of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Officer. Since in this case the penalty has not emanated from the satisfaction of the Income-tax Officer, inasmuch as, the findings and the reasons given by the CIT(Appeals) and the Tribunal are different from the finding and the reasons given by the Income-tax Officer, the ratio laid down in the aforesaid case squarely applies to the facts of this case and penalty is not exigible. We will now see whether the assessee has furnished inaccurate particulars of income in this case. The assessee's stand right from the beginning is that a sum of Rs. 2,99,996, being commission, was paid to Hotel Winrace Pvt. Ltd., Bangalore. The same stand was taken by the assessee right up to the Income tax Appellate Tribunal and not the matter is taken on reference to the High Court. The CIT(Appeals) only found some discrepancy in the stand taken by the assessee and it is also seen that the CIT(Appeals) himself has taken a different stand to that of the Income-tax Officer, inasmuch as, he has held that since the payment of commission is made by the firm to the partners it is disallowable under section 40(b). This, in our opinion, will not amount to furnishing inaccurate particulars of income. We will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the satisfaction of the Income-tax Officer, inasmuch as, the findings and the reasons given by the CIT(A) and the Tribunal are different from the findings and the reasons given by the ITO, the ratio laid down in Anand Bazar Patrika (P.) Ltd.'s case squarely applies to the facts of this case and penalty is not exigible." He also held that "the Explanation 1(A) to section 271(1)(c) would not apply to the facts of this case, as it is merely a rejection of the bona fide explanation offered by the assessee." I am unable to agree with the above findings of my learned brother. 10. In the decision of the Calcutta High Court in Anand Bazar Patrika (P.) Ltd.'s case an amount of Rs. 1,63,000 was added to the taxable income by the ITO under the head "other sources". On appeal, the AAC held that business income of Rs. 6,92,771 had not been accounted for in the books of the assessee. He further held that the said sum of Rs. 1,63,000 added as income from undisclosed sources was a part of such unaccounted business income. The AAC enhanced the assessment by Rs. 5,29,771. Assessee's further appeal to the Tribunal being dismissed for default, this assessment became final. Penalty proceedings under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. In the present case the ITO in his assessment order dated 30-6-1980 referred to Rs. 2,99,996 and held that the transfer by debiting export commission account and crediting the account of Hotel Winrace Pvt. Ltd. and subsequent debiting of the said hotel account and crediting of the accounts of the 4 partners (who happened to be the 4 shareholders in the hotel) was "a clever device adopted deliberately in order to reduce its real income". He further held that "the assessee did not furnish the details of the alleged commission payments originally and but for his diligent examination of the accounts a sum of Rs. 2,99,996 would have escaped the attention of the department." Thus this was the basis for the ITO to initiate penalty proceeding, during the course of the assessment proceeding itself, under section 271(1)(c) by issuing penalty notice as per section 274 read with section 271(1)(c) of the Income-tax Act, 1961. In the order under section 271(1)(c) the ITO had stated that "the assessee was not able to furnish any details or evidence in respect of the services rendered by the company for earning the commission". He also stated that "this was a clear case of concealment of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Winrace were acting as agents on behalf of an export house and that the transfer of Rs. 2,99,996 represented the commission payable to them in their capacity as agents." In the Agreement dated 31-3-1976 between the assessee-firm and Hotel Winrace there was no mention of any particular Export House by name on whose behalf the Hotel Winrace had undertaken to act as an agent. In a later agreement dated 25-5-1977 between the assessee-firm and Hotel Winrace, the name of M/s Greaves International Ltd. was mentioned as Export House and the Hotel was mentioned as their Agent. The export commission was received by the assessee in the relevant accounting year from the following:--- (a) Industrial Cables (P.) Ltd. (b) Bombay Wire Ropes (c) Amco Batteries (d) Greaves International (e) Usha Martin Black (f) Simac Group (g) Young India The amount of Rs. 2,99,996 had been received from Greaves International. As rightly pointed out by the ITO, "if the company Hotel Winrace had actually been acting as an Agent of another person, there is no reason why the commission due to them should have been paid to the assessee firm by the Principal". Export commission from Greaves Internation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which, according to the assessee, the commission was due under an agreement dated 31-3-1966. The Income-tax Officer noted that the corresponding entry crediting the commission in the accounts of the assessee had been made on 31-3-1977 dividing the amount and crediting it to the four shareholders equally. The Income-tax Officer further noted that M/s. Greaves International Ltd., Bombay, from which the assessee had received the commission, has stated in its letter dated 3-3-1978 that it has appointed Hotel Winrace Pvt. Ltd., as its agent and, therefore, there was no reason why commission should have been paid by the assessee-firm. According to the Income-tax Officer, the agreement executed by two of the partners of the firm, one on behalf of the firm itself and the other on behalf of the company, and the apportionment and crediting of the amount in the books of the assessee firm itself to the credit of the partners indicated that it was a clear device to reduce the firm's income and he accordingly added back this amount. On appeal, the CIT(Appeals) was of the view that even though the commission was paid to a limited company it had been ultimately divided among the four partners of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 40(b) of the Income-tax Act, is justified in law." In the meanwhile, by order dated 14-10-1983, the Income-tax Officer imposed penalty of Rs. 2,50,000 under section 271(1)(c) of the Income-tax Act, 1961, on the ground that the Appellate Tribunal had confirmed the addition of Rs. 2,99,996. On appeal, the CIT(Appeals) by his order dated 31-5-1985 confirmed the imposition of penalty, on the ground that the assessee's claim of payment of commission by the firm to the company was false and the consequent addition of the amount on the ground that it was really a payment to the partners thereby forming a part of the assessee's own total income had prevented the assessee from getting away with the reduced tax demand. 4. The assessee appealed further. The learned Judicial Member held that the addition had been upheld on appeal on a ground different from that on which it had been made in the assessment order and in view of the decision of the Calcutta High Court in the case of Ananda Bazar Patrika P. Ltd. the Income-tax Officer had no jurisdiction to proceed on the basis of the modified finding and further since the disallowance was made only under section 40(b) of the IT Act, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company had been assessed to income-tax including the commission income as has been recorded in para. 7 of the order of the CIT(Appeals) dated 31-5-1985. 7. On a careful consideration of the rival submissions, I am of the opinion, that this is not a case in which penalty could be imposed under section 271(1)(c) of the Income-tax Act, 1961. The assessee had claimed that under an agreement dated 31-3-1976, commission had to be paid to Hotel Winrace Pvt. Ltd. It so happened that the partners of the firm are also shareholders of the company and the commission paid by the assessee was credited to the accounts of the partners of the assessee firm in equal shares. It is not in dispute that the said income has been taken to the credit of the Hotel Winrace Pvt. Ltd., in its account and distributed to the shareholders. In fact, it is admitted that the assessee had included this income in its total income and has also been assessed thereon. It may be that because of income and loss from other heads the Lax paid by the company on this commission is much less than what would have been paid had the commission been given directly to the partners and disallowed under section 40(b),Yet the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, 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 or represent the income in respect of which particulars have been concealed." Clause (A) refers specifically to the finding by the Assessing Officer or the CIT (Appeals) and not to a finding in the penalty proceedings. In the present case, in the assessment order, and in the appellate orders thereon, there is no finding that either the company was sham or that the assessee had not paid out the money. It is on the admitted position that the amount had been actually paid that the question whether it should be considered to have been paid to the company or to the partners attracting the provisions of section 40(b) was considered. Even though the Income-tax Officer had mentioned that the payment may not be considered as genuine, his finding had been replaced by the finding of the CIT(Appeals) and the Tribunal that there was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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