TMI Blog2003 (1) TMI 272X X X X Extracts X X X X X X X X Extracts X X X X ..... onsequently the penalty proceedings were not attracted in case of the assessee." 3. The brief facts of the case are that the assessee derives income from export of garments in the status of Individual. The return of income was filed on 29-10-1997 along with audit report under section 44AB declaring a loss of Rs. 36,80,600 as under:-- Net loss from Kiran Modes Rs. 37,49,739 Income from other sources Rs. 69,138 ------------- Rs. 36,80,601 or Rs. 36,80,600 ------------- In the computation of income, the assessee has also given following notes: (1) Loss carry-forward to be set off in future profit. (2) The assessee made export sales but deduction under section 80HHC is not applicable due to losses. He fulfils other conditions entitled under section 80HHC benefits. 4. During the course of assessment proceedings, the assessee has offered to surrender the loss claimed at Rs. 36,80,600 and agreed to complete the assessment at nil income, Accordingly, the AO has completed the assessment at nil income vide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee, in any manner, furnished inaccurate particulars of his income or had, in any manner, committed fraud. The rejection of assessee's explanation does not result in the levy of penalty. There was no specific enquiry into the correctness, truthfulness or accuracy of the particulars furnished by the assessee and concealment was not proved. It was, therefore, submitted that the penalty levied deserves to be deleted. The reliance was placed on the following decisions: (a) CIT v. Vidyagauri Natverlal [1999] 238 ITR 91, 95, 95-96 (Guj.) (b) Addl CIT v. Aggarwal Misthan Bhandar [1981] 131 ITR 619 (Raj.) (c) CIT v. N. Krishnan [1999] 240 ITR 47 (d) Bhagwanji Bhawanbhai Co. v. CIT [1983] 141 ITR 640 (e) Ram Saran Gupta v. Asstt. CIT [1997] 20 Tax World 196 (Jp. Trib.) (f) Rajasthan Vanaspathi Products (P.) Ltd. v. Dy. CIT [1997] 20 Tax World 266 (Jp. Trib.) (g) ITO v. Chiranjilal Tak [1997] 20 Tax World 367 (Jp. Trib.) (h) Asstt. CIT V. Bansiwala Iron Steel Re-Rolling Mills [1998] 21 Tax World 533 (Jp. Trib.) (i) Assam Roller Flour Mills v. ITO 22 Tax World 621 (Jp. Trib.) ITO v. Manjit Singh Baldev Singh Commission Agents [1999] 69 ITD 197 (Asr.) (k) Dy. CIT v. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dertaken. Therefore it cannot be held that the assessee having agreed to surrender, no penal action should have been taken. 2.9 The position of law relating to concealment stands changed after insertion of Explanation to section 271(1)(c). Therefore, in view of decision in the case of B.A. Balasubramanian and Bros. v. CIT 236 ITR 977, the earlier decision in the case of Anwar Ali is no longer good law and Assessing Officer is not required to prove mens rea on the part of the appellant. Since it has become clear that assessee claimed a loss which it was not in position to substantiate nor was there any verifiable evidence in support of the claim, there is no doubt that appellant has furnished inaccurate particulars of income and concealed income in that year to the extent of such excessive loss claimed. It is not a justified argument that the claim of the assessee has been disallowed but that assessee does not have any evidence to support the claim made. Under the circumstances, the imposition of penalty was justified and the same is confirmed being reasonable at the minimum amount imposed." 9. Now, the assessee is in appeal before us. 10. The ld. A/R, besides reiterating the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T [1996] 56 ITD 411 (Hyd.), Shri Ganesh Sizing Factory v. ITO [2001] 25 Tax World 117 (ITAT, Jaipur Bench), ITO v. Madan Mohan Service Station [2001] 26 Tax World 186 (ITAT, Jaipur Bench), Rani Sati Coal Suppliers v. ITO [2001] 26 Tax World 440 (ITAT, Jaipur Bench), CIT v. Aggarwal Pipe Co. [1999] 240 ITR 880, 882 (Delhi), CIT v. Mecon Builders Engineers [2001] 117 Taxman 246 (Delhi), CIT v. C.J. Rathnaswamy [1997] 223 ITR 5, 11 (Mad.), S. Sankaran, CIT v. Prithipal Singh Co. [2001] 249 ITR 670 (SC), Asstt. CIT v. Smt. Geeta Devi [2001] 79 ITD 347 (Delhi) (SMC-II), ITO v. Gurcharan Singh Co. [2001] 72 TTJ (Chd.) 774, Dy. CIT v. Aditya Chemicals Ltd. [2001] 70 TTJ (Delhi) 953, CIT v. Saran Khandsari Sugar Works [2002] 120 Taxman 319 (All.) and Southern Gas Fittings (P.) Ltd. v. Dy. CIT [2002] 80 ITD 202 (Chennai). 11. On the other hand, the ld. D/R, while strongly relying upon the orders of the AO and the CIT(A), submitted that since the assessee was not able to substantiate his claim of loss, therefore, he agreed to be assessed at nil income before the AO and for the reasons mentioned in the order of the AO and the CIT(A), the penalty was rightly imposed by the AO and confi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be used against him. These provisions include the Explanation. By virtue of the notice under section 271 the assessee is put to notice that, if lie does not prove, in the circumstances stated in the Explanation, that his failure to return his correct income was not due to fraud or neglect, he shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof, and, consequently be liable to the penalty under the section. No express invocation of the Explanation to section 271 in the notice under section 271 is necessary before the provisions of the Explanation are applied." It was also held that the law laid down in the case of Sir Shadilal Sugar General Mills Ltd. is not a good law after addition of the Explanation to section 271. Therefore, both these cases are in favour of the revenue and against the assessee. 12.3 In the case of Shiv Lal Tak, the Hon'ble Jurisdictional High Court, while cancelling the penalty under section 271(1)(c) has held that the enhancement in the income is neither of addition or disallowance but a case of substitution. Whereas in the case before us, the loss claimed was such as could not be substantiated. Exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was produced to disapprove the finding of the CIT(A). Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case. 12.7 In the case of D.N. Ghiya, it was found by the Tribunal that the surrender was made prior to detection of any concealment and to buy peace and also to avoid litigation. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A). Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case. 12.8 In the case of Bansiwala Iron Steel Re-Rolling Milts, there was a trading addition by application of higher gross profit rate on which the penalty for concealment of income was imposed and the same was deleted. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s reduced to nil. It was held that it is not a case of concealment as the assessment proceedings are different than the penalty proceedings. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A). Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case. 12.14 In the case of Kejriwal Bros., the penalty was deleted as it was found that the same was imposed only on the basis of admission made by the partner and no other material was brought on record regarding the concealment of income. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A). Hence, the facts of the cited case are distinguishable and not applicabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ossible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A). Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case. 12.19 In the case of Rani Sati Coal Suppliers, the penalty was deleted on the addition of cash credit. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, if was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A). Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case. 12.20 In the case of Aggarwal Pipe Co., the penalty was deleted as the Tribunal has found as a fact that the surrender of credit by the assessee during the course of assessment proceedings was bona fide. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y under section 271(1)(c) and the decision in C.J. Rathnaswamy's case was followed. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A). Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case. 12.24 In the case of CIT v. Prithipal Singh Co. [1990] 183 ITR 69 (Punj. Har.), it was held by the Hon'ble High Court that in the case of loss, penalty cannot be imposed. The Hon'ble Supreme Court in Prithipal Singh Co.'s case [2001] 249 ITR 671 has affirmed the said decision. However, it has been held in the case of P.R. Basavappa Sons v. CIT [2000] 243 ITR 776 (Kar.) that the decision in Prithipal Singh Co.'s case [1990] 183 ITR 69 is in respect of the assessment year 1970-71, i.e., before insertion of the Explanation. Therefore, keeping in view the law laid down by the Hon'ble Supreme Court in K.P. Madhusudhanan's case [2001] 251 ITR 99, the case relied upon by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase is also not applicable to the facts of the assessee's case. 12.28 In the case of Saran Khandsar Sugar Works, the finding that the assessee had agreed to a higher assessment on the condition that no penalty would be imposed, was a finding of fact. Similarly, the finding that no actual concealment was established was also a finding of fact and, therefore, the assessee would be held to have discharged the onus under the Explanation to section 271(1)(c). Accordingly, the Tribunal was justified in cancelling the penalty. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A). Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case. 12.29 In the case of Southern Gas Fittings (P.) Ltd., it was held that simply on the basis of assessee's agreeing to addition, penalty cannot be sustained, revenue must prove mens rea. Whereas in the case before us, the loss claimed was such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Madhusudhanan's case [2001] 251 ITR 99 no error is found in the order of the CIT(A) confirming the levy of penalty under section 271(1)(c) and, accordingly, the order of the CIT(A) is upheld. 14. In the result, the appeal filed by the assessee is dismissed. Per Shri B.R. Jain.-- Unable to concur with the finding and conclusion arrived at by my ld. brother I record my dissent and proceed to pass a separate order as under:-- 2. The assessee is an exporter and his income is exempt under section 80HHC of the Act. Accounts of the assessee are duly audited. The return is accompanied with the report of auditors under sections 44AB and 80HHC of the Act. The assessee returned loss of Rs. 36,80,600. The assessment was completed after examination of books of account. The Assessing Officer was also satisfied that required details have been filed by the assessee and finding to this effect has been recorded in the assessment order. However, the assessee agreed to complete the assessment at nil income. It is pertinent to mention here that the loss of Rs. 36,80,600 was returned by the appellant after claiming set off for an income of Rs. 69,138 from other sources. It is thus the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter making final commitment to the buyer, the cost of raw materials increased, which lowered the profit margin and ultimately caused loss. 4. Meanwhile the other cost affecting factors such as salary, labour, printing, bank interest etc. also jumped and reduced the profit. To increase the production capacity, company began to use the imported machinery. Therefore, the company had to employ some additional staff. It resulted the adverse effect on profit. Salary expenses: 1995-96 1996-97 2.01 lakhs 5.40 lakhs 5. The goods exported under L/c No.: Once stood still at Singapore during the transaction. We had to air lift the cargo (under invoice No. KM/58) from Singapore to New York. In this case, company had to pay 3 + lakhs as air freight otherwise according to clause in above L/c. The freight was liable to pay at destination (buyer) Our company had lodged a case against the freight carrier company (M/s. Natvar Pareekh Industries, Jaipur) for the default in services and asked to return the amount with interest. The case is yet to be decided by the Hon'ble Court. Freight expenses: 1995-96 1996-97 0.81 lakhs 4.15 lakhs 6. It was our misf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability to give such an explanation. The accounts have also not been rejected. The Assessing Officer didn't say that he is not satisfied about the correctness or completeness of the accounts maintained by the assessee nor did he show his inability of deduce the profits from business. No defects were pointed out nor any deviation found in the method of accounting employed during the year. No sale or purchase were doubted. Complete quantitative tally was available on record. No enquiry was made neither in the assessment proceedings nor in penalty proceedings for alleging the claim as fraudulent. Stating fraudulent claim as a fact in her penalty order is absolutely wrong, contrary to the facts and without any basis or material on record. I have also perused the show-cause notice issued by the Assessing Officer. At no stage of the proceedings the assessee was asked to explain the manufacturing defect. Holding that the assessee could not even explain the manufacturing defect is therefore without any basis or material on record and is thus erroneous. I am therefore satisfied that there was no such basis for formation of any opinion by the Assessing Officer in penalty proceedings that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is after discussion with the then Assessing Officer he felt persuaded to accept the assessment at nil income as it would result in no financial implications at all. It was also deposed by the assessee in the affidavit that he had foregone the loss to avoid protracted proceedings and to purchase peace, particularly when no financial burden was to come. It has further been deposed that he attended the proceedings without the company of his legal advisor and could not even remotely envisage any penalty situation in the circumstances, particularly when every fine details were submitted during the earlier hearings by his counsel. The said affidavit appears to have been sent to the Assessing Officer for obtaining a remand report but no contrary material thereto has been brought by the Assessing Officer in the remand report dated 7/9-2-2001 sent to the ld. Commissioner of Income-tax (Appeals) under her letter No. 1157. The Assessing Officer in the remand report merely expressed her opinion which was not a result of any material available on record nor found from any of the enquiry conducted by her or her predecessor. This was her subjective opinion and not satisfaction as required under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred:-- "Whether on the facts, findings and in law there was any justification in confirming the penalty of Rs. 14,45,240 imposed under section 271(1)(c) of the I.T. Act, 1961?" 2. We direct the registry to place the matter before the Hon'ble President, ITAT. The following further question of difference may also be referred to the Hon'ble President, ITAT in terms of section 255(4) of the Income-tax Act, 1961:-- "Whether while deciding this appeal, reasons of loss as mentioned in the assessee's letter dated 210-9-T999 can be considered as good reasons which could not be substantiated by the assessee at any stage of hearing either before the A.O., CIT(A) or before the Tribunal and to avoid deep scrutiny/investigation he offered to surrender the loss in the assessment proceedings. REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 As there is a difference of opinion between the Members, the same is required to be resolved by one or more Members of the Tribunal as nominated by the Hon'ble President, ITAT in terms of section 255(4) of the I.T. Act. Accordingly, the question on which the Members have unanimity is referred as under:-- "Whether on the facts, fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income from export of garments and was entitled to deduction under section 80HHC of the Income-tax Act. But the above deduction was not claimed as it was a case of loss. The detail of income disclosed by the assessee is as under:-- Loss from business Rs. 37,49,738 Less : Income from other sources Rs. 69,138 ------------- Rs. 36,80,600 ------------- The Assessing Officer took assessment and raised several queries which I shall refer to in detail a little later. Ultimately, the assessee agreed that income be taken at nil. The Assessing Officer accordingly, vide order dated 15-2-2000 took the income at nil. The assessment order is a brief order and is reproduced here in below:-- "Return of income was filed on 29-10-1997 declaring loss of Rs. 36,80,600. Notice under section 143(2) of the Income-tax Act issued and served upon the assessee in response to which V.K. Gupta, CA and A.R. of the assessee attended from time to time. Books of account produced which have been examined on test check. Required details have also be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me-tax Appellate Tribunal, under section 255(4) of the Income-tax Act. 6. The facts of the case as reflected in separate orders of the learned Members are discussed hereinbelow. 7. The learned Judicial Member first noted the plea raised by the assessee in response to show-cause notice issued under section 271(1)(c) of the Income-tax Act and how it was rejected by the Assessing Officer. He then recorded submission of the assessee in appellate proceedings before the Commissioner of Income-tax (Appeals). It is noted that the assessee had contended that except for rejection of explanation of the assessee, no specific enquiry into the correctness, truthfulness, accuracy of particulars furnished by the assessee was gone into nor any concealment proved. The penalty was sought to be cancelled on the basis of decisions of different High Courts and of various Benches of Tribunal as are noted at pages 4 to 5 of his order. The assessee further filed an affidavit before the Commissioner of Income-tax (Appeals) stating therein that in response to a telephonic call, the assessee agreed to make a surrender to be assessed at nil income in order to avoid protected proceedings and to purchase pea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iculars of income and concealment income in that year to the extent of such excessive loss claimed. It is not a justified argument that the claim of the assessee has been disallowed but that assessee does not have any evidence to support the claim made. Under the circumstances, the imposition of penalty was justified and the same is confirmed being reasonable at the minimum amount imposed." 8. The learned Judicial Member, after considering the submission of the assessee and that of learned Departmental Representative, considered and discussed the following cases:-- Suresh Chandra Mittal [2000] 241 ITR 124 (MP) Affirmed by Hon'ble Supreme Court in Suresh Chandra Mittal [2001] 251 ITR 9 (SC). The said case was distinguished as revised return was filed in that case, whereas no revised return was filed in this case by the assessee. K.P. Madhusudhanan [2001] 251 ITR 99. The above case was held to be in favour of the Revenue and not of the assessee. Shivlal Tak's case [2001] 251 ITR 373 (Raj.) This case was also distinguished on the ground that claim of loss made in the return was not substantiated here. The Explanation given by the assessee in this regard was only general. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer and the Commissioner of Income-tax (Appeals) while holding that there is a concealment of income. Clearly, therefore, it is a case that comes under section 271(1)(c). Explanation 1, thereof which provides that in a case where the explanation is offered which is found by the Assessing Officer to be false or no explanation is offered or an explanation is offered which could not be substantiated the amount added in computing the total income of such person shall be deemed to represent the income in respect of which particulars have been concealed. In this case, the Assessing Officer found that the assessee has not substantiated his claim of loss and proceeded to impose the penalty which was upheld by the Commissioner of Income-tax (Appeals). Since the assessee was unable to furnish any evidence in support of his claim of loss and without filing any revised return of income, he offered to be assessed at nil income, therefore, keeping in view that the loss claimed was such as could not be substantiated and in the absence of any contrary material against the finding of the Commissioner of Income-tax (Appeals) and also respectfully following the decision of Apex Court in [2001 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5-96 1996-97 2.01 lakhs 5.40 lakhs 5. The goods exported under L/c No.: Once stood still at Singapore during the transaction. We had to air lift the cargo (under invoice No. KM/58) from Singapore to New York. In this case, company had to pay 3 + lakhs as air freight otherwise according to clause in above L/c. The freight was liable to pay at destination (buyer). Our company had lodged a case against the freight carrier company (M/s. Natvar Pareekh Industries, Jaipur) for the default in services and asked to return the amount with interest. The case is yet to be decided by the Hon'ble Court. Freight expenses: 1995-96 1996-97 0.81 lakhs 4.15 lakhs 6. It was our misfortune that all bulk orders procured were in stock fabrics with waifer thin margin. As the fabric was not fresh, production and finishing time got doubled and on the other hand, labour cost, factory overheads, bank interest burden diminished our profit margin." "4. The assessee again filed a letter stating further reason for loss as under:-- (i) "There is gross loss of Rs. 19.89 lakhs in trading account. Major loss is loss in trading. As given earlier point 6 of reason of losses the lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onic call from the office of the Assessing Officer, the assessee was persuaded to accept the assessment at nil income as the same involved no financial implication. The learned Commissioner of Income-tax (Appeals) had also obtained a remand report from the Assessing Officer which was sent vide letter No. 2257, dated 7/9-2-2001. However, in the remand report, the Assessing Officer merely expressed her opinion which was not result of any material available on record. The opinion expressed was her subjective opinion and not satisfaction as required under the statutory provisions. The learned Accountant Member concluded as under:-- "Since complete details were available and assessee did not agree of concealed income nor that he had furnished inaccurate particulars, the assessee appears to have been persuaded to have agreed to be assessed at nil income, this too because he entertained a bona fide that there will be no financial burden on him and could not seven remotely envisage any penal situation. Under such glaring facts and circumstances, there was no necessity or occasion nor any time available with him to file a revised return. I am, therefore, satisfied that the assessee ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ders of the Revenue authorities levying penalty were also assailed as bad in law as no satisfaction was recorded during the course of assessment proceedings about concealment of income or furnishing of inaccurate particulars of income under section 271(1)(c) for initiating of valid penalty proceedings. The assessee relied upon the following decisions:-- (i) CIT v.Ran Commercial Enterprises Ltd. [2000] 246 ITR 568(Delhi). (ii) Diwan Enterprises v. CIT [2000] 246 ITR 571 (Delhi). (iii) CIT v. Suresh Kumar Bansal [2002] 254 ITR 130. 16. The learned counsel also assailed levy of penalty as no tax was found to be payable on nil assessed income. In this connection, reliance was laced on decision of Rajasthan High Court in the case of CIT v. Harshvardhan Commercials Minerals Ltd., 28 TW 374 (Raj.), as also on the decision of Punjab Haryana High Court in the case of Prithipal Singh Co., [1990] 183 ITR 69 which was confirmed on appeal by the Hon'ble Supreme Court in the case of Prithipal Singh Co. [2001] 249 ITR 670. The assessee also relied upon several other decisions including the decision of Hon'ble Madras High Court in the case of N. Krishnan and also on the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned Judicial Member in 23 pages in the proposed order. He has further considered all the decisions cited by both the parties. The penalty order of Commissioner of Income-tax (Appeals) is liable to be confirmed on account of decision of Hon'ble Supreme Court in the case of K.P. Madhusudhaiian [2001] 251 ITR 99. 19. The learned Department Representative further tried to support the proposed order of learned Judicial Member by referring to certain facts noted in the proposed order of the Hon'ble Members as under:-- "(I) On page 1 (para 2), the Hon'ble Member has observed that the income of the assessee is exempt under section 80HHC of the Act, accounts are duly audited, the return is accompanied auditors' report under sections 44AB and 80HHC and assessment was completed after examination of books of account. The assessee claimed loss of Rs. 36,80,600. All these facts were also verified by the assessee while signing the verification in the return of income on 25-10-1997 (copy enclosed). He also made specific notes below the computation of total income. (i) Loss carried forward to set-off in future profit Rs. 36,80,600. (ii) The assessee made export sales but deduction under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer. The learned Departmental Representative also placed on record copy of decision of Hon'ble Rajasthan High Court in the case of CIT v. Mohd. Mohtram Farooqui [2002] 125 Taxman 164 to justify the levy of penalty. 20. I have given careful thought to the proposed order of my learned brothers, arguments of parties and material available on record. I would like to take up legal and technical submissions advanced on behalf of the assessee opposing levy of penalty. The first legal submission which would like to consider, relates to non-recording of satisfaction by the Assessing Officer in the course of the assessment proceedings, before initiating proceedings under section 271(1)(c) of the Income-tax Act. The learned Accountant Member had made a reference to the fact that the satisfaction in accordance with law has not been recorded. The learned counsel for the assessee further argued that initiation of penalty proceedings was bad in law as the Assessing Officer failed to record satisfaction about concealment of income or furnishing of inaccurate particulars of income. He referred to two decisions, one of Hon'ble Delhi High Court and another of Punjab Haryana High Court, referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 271(1)(c) is not equated to recording of requisite satisfaction. Likewise, the fact that the loss was surrendered does not make any difference to the legal position. Thus, the impugned order of penalty suffers from incurable legal defect and, therefore, penalty proceedings are held to have not been initiated in accordance with law. The penalty levied is liable to quashed on this short ground. 23. The second legal defect is based on the decision of Hon'ble Supreme Court in the case of Prithipal Singh Co. [2001] 249 ITR 670, whereby their Lordships confirmed the decision of Hon'ble Punjab Haryana High Court in the case of Prithipal Singh Co. [1990] 183 ITR 69. Their Lordships of Punjab Haryana High Court upheld the cancellation of penalty in a case where there was no assessed income, nor any tax was found to be payable on assessment with the following remarks:-- "Penalty imposed in paid in addition to the tax payable. When there is no tax payable, the question of any penalty does not arise. In fact, evasion of tax is the sine qua non for imposition of penalty. Clause (iii) deals with cases referred to in clause (c) under sub-section (1) of section 271 of the Act and it cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 383 observed as under:-- "Different considerations apply when a special leave petition under article 136 of the Constitution is simply dismissed by saying 'dismissing', and an appeal provided under article 133 is dismissed also with the words 'the appeal is dismissed'. In the former case it has been laid down by this court that when a special leave petition is dismissed this court does not comment on the correctness or otherwise of the order from which leave to appeal is sought. But what the court means is that it does not consider it to be a fit case for exercise of its jurisdiction under article 136 of the Constitution. That certainly, could not be so when an appeal is dismissed though by a non-speaking order. Here the doctrine of merger applies. In that case, the Supreme Court upholds the decision of the High Court or of the Tribunal from which the appeal is provided under clause (3) of article 133. This doctrine of merger does not apply in the case of dismissal of a special leave petition under article 136. When an appeal is dismissed, the order of the High Court is merged with that of the Supreme Court." Thus, order of Hon'ble Punjab Haryana High Court merged with the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f total income. There is no dispute that in the present case, the income was taken at nil and that no tax was payable. In the light of decision of Prithipal Singh Co.'s case no penalty in my humble view could be imposed under section 271(1)(c) of the Income-tax Act. I hold accordingly. 27. Without prejudice to the above findings, I proceed to consider the levy of penalty on merit. As noted earlier, the levy of penalty was confirmed on appeal. On further appeal before the Tribunal, the learned Judicial Member in his 23 pages proposed order considered all material facts and judicial pronouncements cited before him and after making particular reliance on the decision of Hon'ble Supreme Court in the case of K.P. Madhusudhanan [2001] 251 ITR 99 confirmed the action of the ld. CIT A and proposed to dismiss the appeal of the assessee. 28. The learned Accountant Member dissented from the above order and held that penalty imposed should be deleted. The learned Departmental Representative has also emphasized the two factors (i) loss of Rs. 36,80,600 was claimed and verified in the return and (ii) why the assessee had not relied upon his audited books of account and audit report. The on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bers taking opposite views and it is not permissible to take additional evidence into consideration while deciding the issue as a third Member. In the above situation and when nothing is stated in the assessment order, I am inclined to agree with the learned Accountant Member that findings of the Assessing Officer to the extent that the assessee fraudulently claimed the loss and surrendered the same when deep investigation were started, are no justified. All the same, the learned Judicial Member in his order has recorded a finding that the assessee failed to substantiate the claim of loss made in the return and, therefore, levy of penalty was justified. He has also approved the levy as no revised returns were filed by the assessee. These findings are sought to be supported by the ld. Revenue authorities. In the following paras, I consider this aspect of the matter. This is without prejudice to the earlier finding on additional evidence. 31. The learned Commissioner of Income-tax (Appeals) in his order confirmed the levy of penalty purportedly referring to what happened before the Assessing Officer during the course of assessment proceedings although the Assessing Officer did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irmation. (h) Proof of addition to assets. The case was adjourned to 23-8-1999. (v) What happened on the date fixed i.e. 23-8-1999 is not recorded in the order-sheet. (vi) The next entry dated 8-9-1999 states that the case was adjourned to 20-9-1999. (via) What happened on 20-9-1999, the date fixed, is again not recorded. (viii) The next entry is dated 11-10-1999 and is to the following effect:-- "11-10-1999--Sh. V.K Gupta attended. Reply filed. The reasons stated for loss are general and not substantiated. To explain- (1) Foreign "Travel-places to which journey, undertaken purpose. (2) Details of salary-Names and addresses of new employees Mode of payment and proof. (3) Explain point No. 6 of reason for loss. (4) Details of increase in freight. (5) Explain clearly as to why loss incurred and substantiate it with proof and in figures. (6) Balance, confirmation. Case adjourned for 27-10-1999." (ix) It is again not recorded as to what happened on 27-10-1999, the date fixed for hearing. (x) The next entries dated 2-11-1999 and 15-11-1999 are to the following effect:-- "2-11-1999-Sh. V.K. Gupta, CA attended, Adj. for 11-12-1999 to bring books of accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not clear from the record as to what happened on 28-12 1999, the date fixed. (xiv) Again there is entry dated 30-12-1999 marking attendance/presence of the assessee and his representative, Sh. V.K. Gupta only. Nothing about what happened in the assessment proceedings, is recorded. The case is adjourned to 12-1-2000. This date appears to be superimposed. (xv) No record of any proceedings having been taken place on 12-1 2000 is recorded in the order-sheet. (xvi) The next entry is dated 12-1-2000 wherein Sh. V.K. Gupta, C.A.'s attendance is recorded. It is further recorded that,-- "(1) The papers regarding case in (freight) Consumer Court show entry upto 31-1-1997. No details or- correspondence with the erring party given. (2) Books of account to verify instances of sale on cheaper rates. (3) Why salary is almost three times when production is less? Also summons issued to members remained unserved with remarks unverifiable unknown. Hence this expenditure is not fully verifiable. (4) The damaged stock was sold in the local market or exported. Normally foreign buyers reject sick stock. Adjourned for 25-1-2000." (xvii) No entry of the adjourned date i.e. 25-1-2000 is r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries. She raised an objection to the higher claim of salary to staff when production was less but stated nothing about the loss claimed. The Assessing Officer now on the adjourned date wanted to know whether damaged stock was sold in the local market or exported. She raised a new query whether such stock was sold in local market or exported and surmises that normally foreign buyers reject such stock? When entry dated 21-12-1999 and earlier entry are read with entry dated 20-1-2000, it cannot be inferred that claim of loss was not substantiated. The only query left to be explained was whether the damaged stock was sold in the local market or exported. At best, an inference can be drawn that the above query was not answered to. Would it follow that claim of loss was not substantiated? 35. It is further pertinent to note that the assessee was directed to remain present in assessment proceedings along with books of account right from 28-12-1999 till 27-1-2000. Several dates were fixed in the abovementioned period, some of dates were not even noted in the order-sheet and other dates though noted, the detail of proceedings is not recorded. Why assessee's presence/attendance was necessa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. These were checked and verified by the Assessing Officer. The assessee further gave the background as to why the loss was suffered and those reasons were given in correspondence furnished to the Assessing Officer. Those reasons were no doubt of general nature as details and specific instance of purchases, sales and expenditure which led to "loss" were duly recorded in the books of account. The Assessing Officer obtained month-wise details of sales and purchases and it is nobody's case that such details of sales and purchases were not filed. No defect is found in the above sales and purchases and it is not the case of the Revenue that the above details furnished were not sufficient to carry on investigation and verification or did not contain names and particulars of the buyers or did not show whether it was export sale or local sale. In the above situation how it could be said that the loss was not substantiated. It is stated that the stock register was not produced to show that the goods were damaged and defective. No such finding is recorded in the assessment order. If such a finding is recorded in some secret note, then it is of no help. Further I do not know-how stock regist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate particulars of such income, he may direct that such person shall pay by way of penalty,-- (iii) In the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of such income." 37. The Explanation 1 to section 271(1)(c) applicable in the relevant period was to the following effect:-- "Explanation 1--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 Assessing Officer or the Commissioner (Appeals) or the Commissioner to be false or (B) such person offers an explanation which he is not able 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 to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould not be a fantastic or fanciful one. As indicated above, the consequence follows as a matter of law. The burden is on the assessee. If he fails to discharge that burden, the presumption that he had concealed the income or furnished inaccurate particulars hereof is available to be drawn" 38. I have difficulty in accepting that the above decision is applicable to the present case. As noted earlier, the Assessing Officer passed a very brief order and held nothing about concealment of income or furnishing of inaccurate particulars of income. Nothing is said about the explanation offered by the assessee and assessment is based on agreement with the assessee to take the income at nil. Therefore, there is no basis to apply the explanation. In the penalty order, the Assessing Officer did observe that the assessee could not substantiate the claim of loss and had no explanation to offer. It is further observed that the loss was fraudulently claimed and manufacturing defect could not be explained. I have also noted the observations of learned Commissioner of Income-tax (Appeals) on further appeal and that of learned Judicial Member in appeal carried by the assessee to the Tribunal. It h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e books did not record sale of damaged goods or whether these were sold in local market or exported. There is no finding to the above effect, nor any defect was found in the sales recorded. In the assessment, it is specifically mentioned that books of account were produced and checked. It is, therefore, not possible to hold that the assessee failed to substantiate explanation offered by him. 40. Even if for the sake of argument accepted that the assessee was not able to substantiate his explanation and clause (B) of the Explanation is applicable here, the Revenue authorities are further required to record a finding that the assessee had failed to prove that his explanation was bonafide and that all material facts relating to compute his income were not disclosed by the assessee. I have already discussed in great details material facts and background of the case. On above facts, it is not possible for me to hold that explanation furnished by the assessee was not bona fide and material facts relating to computation of his total income were withheld by the assessee. It is clear on record that assessment is totally based on the offer of the assessee to get assessed at nil income with ..... X X X X Extracts X X X X X X X X Extracts X X X X
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