TMI Blog1992 (10) TMI 133X X X X Extracts X X X X X X X X Extracts X X X X ..... everal Order Books, Daily Collection Chittai and Day Books, revealing the full extent of the assessee's income. Certain investments in certain properties, both movable and immovable, also came to light. 4. In the course of the assessment proceedings for the assessment year 1983-84, the Assessing Officer naturally used the seized material as the starting point for making inquiries. On a close study of the seized material, the Assessing Officer found that the assessee was maintaining Order Books for the orders executed. The daily collections are first recorded in the Daily Collection Chittai. Thereafter, the entries in the Chittai are taken to the Day Book and the Ledger. The Assessing Officer further found that the assessee had omitted to record the daily collections in the Chittai and consequently in the Day Book and the Ledger. The details of the extent of the collections omitted to be recorded are given below : --------------------------------------------------------------------------------------------------------------------------------------------------- A/c Asst. Yr. Period for which No. of No. of Omission year both the order orders orders in book and chittai execu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the revised return of income filed by him did not find favour with the Assessing Officer. As respects the daily collections omitted to be included, the Assessing Officer, going on the basis of the extent of omission disclosed by the seized Order Books, etc. relating to the immediately three preceding assessment years, estimated the omission in collections at Rs. 3,50,000. 7. Secondly, the Assessing Officer did not consider it necessary to give any allowance in respect of the expenditure incurred by the assessee because, according to the Assessing Officer, the expenditure incurred by the assessee had already been entered in the books of accounts maintained by him for production before the Assessing Officer. 8. The Assessing Officer also made the following further additions : Unexplained investments : (i) Tailoring machines Rs. 5,531 (ii) Jewellery : In the name of : (a) The assessee Rs. 12,312 (b) Wife and children Rs. 19,602 Rs. 31,914 (iii) The Kalyana Mandapam Rs. 91,800 (iv) Tallakulam property Rs. 1,66,000 (v) Bajaj scooter Rs. 8,900 (vi) TVS Moped Rs. 4,500 (vii) Ariyur Land Rs. 8,380 (viii) Unexplained deposits in Bank A/c Rs. 40,463 (ix) Unex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment proceedings, the Assessing Officer had initiated penalty proceedings under section 271(1)(c) of the Act and had called upon the assessee to show cause why penalty under the said section should not be levied. And on 16-2-1989, the Assessing Officer closed the penalty proceedings observing : "The assessee's representative. Shri A. Satyamurthy, Advocate, appears and explains. Taking into account the written reply filed and also the explanation offered, penalty under section 271(1)(c) is dropped." 13. Subsequently, the Commissioner of Income-tax, Madurai, invoking the powers vested In him by and under section 263 of the Income-tax Act, 1961, called for and examined the records of the assessee. On such an examination, he found that the aforesaid order dated 16-2-1989 of the Assessing Officer, dropping the proceedings under section 271(1)(c), was erroneous in that it was prejudicial to the interests of the revenue. In this regard, he was impelled by the consideration that in the face of the finding of definite suppression of tailoring charges, the dropping of the proceedings under section 271(1)(c) was unwarranted and hence prejudicial to the interests of the revenue. He, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foresaid arguments found favour with the CIT. (a) As for the contention that the order dropping the penalty proceedings not having been communicated to the assessee, there was no effective order which could be the subject-matter of revision under section 263 : this contention, it would appear, was withdrawn at the time of the hearing before the CIT. Even so, the CIT took note of the fact that the assessee was aware of the fact that the penalty proceedings have been dropped. This would be clear from the communication dated 31-3-1989 from Shri K. L. Tilakchand, the senior Authorised Representative, ITAT, Madras. (b) The argument based on limitation was also not acceptable in view of the settled legal position that limitation prescribed under section 275 applies only to the initial orders of the authority which Imposes penalty and not to a fresh order passed on remand. In this regard, the CIT referred to and relied upon (a) the Supreme Court case of CIT v. National Taj Traders [1980] 121 ITR 535 and (b) the Gujarat cases of Vasani Co. v. CIT [1978] 112 ITR 819 and CIT v. Vakharia Cotton Traders [1986] 161 ITR 441. (c) The factual errors in the notice issued under section 263 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t have lawfully dropped the penalty proceedings which had earlier been initiated under section 271(1)(c) of the Act. It should, therefore, follow that recourse to section 263 of the Act is available to the CIT. In view of the foregoing, therefore, the CIT passed the impugned order in revision, cancelling the order dropping the penalty proceedings and directing the Assessing Officer to make a fresh order after taking into account all the materials available on record and after making further enquiries, if necessary, and after giving the assessee a reasonable opportunity of being heard. 16. It is in these circumstances that the assessee is now before us. 17. Shri J. Rama Iyer, the learned counsel for the assessee, took us through the facts and circumstances of the case and contended that on the facts and in the circumstances of the case, the CIT was not justified in passing the impugned order in revision. In this regard, he made the following points : (a) In this case, the Assessing Officer had made a noting on the Order Sheet dropping the penalty proceedings. Such a noting cannot be regarded as an order so as to give the CIT access to section 263 of the Act. The Calcutta cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impugned order in revision is in fact infructuous. Further, as already contended, a noting to the effect that penalty proceedings are dropped could not be regarded as an order imposing penalty. In this case, an order imposing penalty was not passed. Ibis is yet another reason why the CIT cannot extend the period of limitation by taking recourse to section 263 of the Act. (d) The revised return in question was filed under the Amnesty Scheme : and under that scheme, immunity was granted from penalty and prosecution. It should, therefore, follow that the minute recorded by the Assessing Officer to the effect that the penalty proceedings be dropped could not be regarded as being prejudicial to the interests of the revenue. In this regard, Shri Rama Iyer reiterated the arguments based on the CBDT Circular Nos. 451 of 17-2-1986 and 441 of 15-11-1985, referred to above, which had earlier been unsuccessfully advanced before the CIT. (e) Shri Rama Iyer then contended that in the ultimate analysis, the assessee's income came to be estimated and hence there was no question of levying penalty. In this regard, he referred to and relied upon the following cases : 1. CIT v. J.K.A. Rajappa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd not to orders passed in compliance with the orders passed by the superior officers. In this regard, he referred to and relied upon the following cases : (1) National Taj Traders' case (2) Vasani Co.'s case (3) Vakharia Cotton Traders'case. 22. Dealing next with Shri Rama Iyer's contention that the Assessing officer having exercised his discretion not to levy penalty, the Commisstoner could not have taken recourse to section 263, Shri Rajan contended that the discretion vested with the Assessing Officer must be based on objective and not subjective satisfaction of the Assessing Officer. Where the discretion was obviously erroneously exercised, such an exercise could always be called in question. In this regard, be referred to and relied upon the following cases : 1. CIT v. Cochin Malabar Estates Ltd. [1974] 97 ITR 466 (Ker.) 2. Premchand Sitanath Roy v. Addl. CIT [1977] 109 ITR 751 (Cal.) and 3. V. Subramonia Iyer v. CIT [1978] 113 ITR 685 (Ker.). Continuing his arguments on this point, Shri Rajan contended that the case before us was not one of technical or venial default. It was one of systematic omission of tailoring charges. What was more, the said systemati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts based on the Amnesty Scheme are fit to be rejected. 25. The next limb of Shri Rajan's argument was that simply because the assessee's income from tailoring establishment was estimated, it did not necessarily follow that no penalty was exigible. In the case before us. systematic suppression of tailoring charges in the previous years relevant to the earlier assessment years came to be detected during the search and seizure operations. The assessee was asked to produce the primary records such as Order Book, Daily collection chittai, etc. relating to the assessment year 1983-84. But the assessee failed to produce them on the ground that they had been destroyed. It was, therefore, that the Assessing Officer had no go but to estimate the suppressed income of the assessee. What is more significant, the assessee himself estimated the unaccounted tailoring charges at Rs. 1 lakh and the net income therefore at Rs. 37,000 roundly. One thing, therefore is clear and that is that even according to the assessee, there was suppression of tailoring charges. In the circumstances, therefore, penalty is clearly exigible. In this regard, besides relying upon the cases referred to and relied up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tailoring charges during the relevant previous year. 29. Drawing our attention to paragraph 3 of the assessee's letter dated 23-1-1989 (see page 8 et seq of the paper book filed by the assessee), Shri Rama Iyer contended that the provisions of Explanation 1(B) to section 271(1) (as they stood prior to the amendment) clearly applied to the case. 30. Adverting next to Shri Rajan's contention that the assessee had not raised any plea based on the Amnesty Scheme before the authorities in the quantum proceedings, Shri Rama Iyer contended that the stand taken in the quantum proceedings would not be conclusive in matters relating to penalty. 31. Shri Rama Iyer then urged that we should not lose sight of the fact that all that had happened in the assessment for the assessment year 1983-84 was that the assessee had come forward admitting suppression of tailoring charges of Rs. 1 lakh and that the suppressed income ultimately came to be estimated by the IT authorities. In these circumstances, the Madras decisions in the cases of J.K.A. Rajappa Chettiar and K. P. Kandasami Mudaliar Sons would be applicable. He further contended that the aforesaid two decisions which are later decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gned order in revision. Shri Rama Iyer's contention is that the said minute is not an order within the meaning of the said section. This contention is naturally opposed by Shri Rajan. 37. As we see it, as rightly contended by Shri Rajan, the power to levy penalty includes the power not to levy penalty and, consequently, even a minute recorded by the Assessing Officer to the effect that the penalty proceedings are dropped, is an order within the meaning of section 263 of the Act. As already pointed out, orders that are prejudicial to the interests of the Revenue are those that are not in accordance with law and which by the same token have prevented the realisation of revenue lawfully due to the State. Conceptually speaking, therefore, in the context in which it appears in section 263 the word "order" denotes acts of omission or commission on the part of the Assessing Officer which have prevented the realisation of revenue lawfully due to the State. Viewing the matter thus--and we are convinced that that is the right way of viewing the matter we consider the impugned minute of the Assessing Officer is an order within the meaning of section 263 of the Act and is, by the same token, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be treated as an order. 40. The question that then arises for consideration is whether the said order is erroneous in that it is prejudicial to the interests of the Revenue. The answer to this will depend on the answer to the further question, whether, on the facts and circumstances of the case, the CIT was justified in concluding that penalty under section 271(1)(c) was exigible in this case. To answer this question, we must go to the facts of the case. 41. The facts of the case are that in the course of search and seizure operations, the Department seized a number of records, which revealed that the assessee was systematically suppressing tailoring receipts. The amount suppressed ranged from Rs. 13,542 in the previous year relevant to the assessment year 1980-81 to Rs. 2,88,735 in the previous year relevant to the assessment year 1982-83. When the Assessing Officer discovered the above suppression of tailoring charges, he naturally called upon the assessee to produce the Order Books, and Daily collection chittais relating to the assessment year 1983-84, which is now before us. The assessee responded by contending that the said records had been destroyed. Even so, he c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rscoring the factum of suppression of tailoring charges and consequently the income flowing therefrom. During the relevant previous year, the assessee had made various investments which he had failed to account for in his books of account ; and the Tribunal ultimately quantified such investments at Rs. 1,48,094. Even here, the assessee asked for and obtained a set off (against the said sum of Rs. 1,48,094) a sum of Rs. 1,24,000 from out of the "amount added in respect of turnover outside the books" : The Tribunal allowed the assessee's claim, because in respect of such suppressed turnover "cash would have been available to the assessee". Here again, the assessee's claim merely underscores the factum of suppression of income by the assessee. Items of expenditure not recorded in the books of account, undisclosed or unexplained investments are but the outward manifestation of undisclosed income. The discovery of the former is ipsofacto the discovery of the latter. 43. Given the totality of the circumstances, we have no hesitation in coming to the conclusion that the case before us is clearly one of suppression of income. 44. It is also significant that the assessee came forward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring charges was detected. Only when he was faced with the said detection that the assessee came up with the admission that he had suppressed tailoring charges to the extent of Rs. 1 lakh. No doubt, the quantum of the income arising out of the suppressed receipts came to be estimated by the Tribunal at Rs. 1,43,437. Even so, the assessee's filing a revised return on the basis of his own estimate cannot be said to be voluntary in the true sense of the term. He was forced to do so by the fact that the search and seizure operations had revealed systematic suppression of tailoring charges, though in the previous years. 47. In view of the foregoing, therefore, we hold that this was a fit case for levy of penalty under section 271(1)(c) of the Act. Yet, for reasons best known to himself, the Assessing Officer chose to drop the penalty proceedings. The minute recorded by the Assessing Officer to that effect is clearly an order which is erroneous in that it was prejudicial to the interests of the Revenue. We, therefore, hold that the CIT was justified in taking recourse to section 263 of the Act. 48. We are not impressed by Shri Rama Iyer's argument that the Assessing Officer having dr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere the statute gives an authority or jurisdiction for exercise of discretion on certain objective factors, the exercise of such discretion must be manifest, so that it could readily be gathered by all concerned whether the discretion had been properly exercised or not. 51. In the Kerala case of V. Subramonia Iyer, it has been held that what is contemplated under section 271(1) is not the subjective satisfaction of the ITO. The true effect of the said ratio is that when the ITO proceeds to levy penalty or decides to drop the penalty proceedings initiated, his satisfaction to that effect must be borne out by the facts and circumstances of the case. Where the decision taken by him is contrary to the facts of the case, then his decision must be held to be arbitrary and struck down as such. 52. In view of the foregoing, therefore, we hold that given the facts of the case, which clearly warrant levy of penalty, the Assessing Officer had arbitrarily exercised his discretion to drop the penalty proceedings. 53. The question that then arises for consideration is whether the revised return is governed by the Amnesty Scheme. As we see it, it is not. As rightly pointed out by the CIT, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e arguments based on the bar of limitation imposed by section 275 of the Act. The assessee's case is that the time limit for passing a penalty order expired on 28-2-1989 and that consequently, the order in revision passed by the Commissioner on 25-3-1991 is really infructuous. It is also the assessee's case that the minute recorded by the Assessing Officer dropping the penalty proceedings is not an order within the meaning of section 263 and that consequently, the Commissioner could not lawfully take recourse to section 263 to extend, by the back-door as it were, the period of limitation prescribed under section 275 of the Act. As we see it, both the arguments are without force. As for the latter argument, we have already held that the impugned minute recorded by the Assessing Officer is an order. As for the former, as rightly contended by Shri Rajan, there is a long catena of cases in which it has been laid down that the period of limitation prescribed by section 275 is applicable only to the initial order to be passed by the Assessing Officer and not to the orders that he statutorily obligated to pass pursuant to the directions given by the superior officer such as the Commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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