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TMI Blog1996 (2) TMI 100X X X X Extracts X X X X X X X X Extracts X X X X ..... the introduction of the Explanation to section 271(1)(c) of the Act, the burden is not on the Revenue to establish that the amount concealed was of income nature ? Did the Appellate Tribunal interpret section 271(1)(c) of the Act properly and apply the proper law regarding the penalty in the instant case ? Is not the reasoning and conclusion of the Appellate Tribunal against the ratio of the decisions reported in Gumani Ram Siri Ram v. CIT [1972] 85 ITR 67 (P & H) ; CIT (Addl.) v. Karnail Singh V. Kaleran [1974] 94 ITR 505 (P & H) ; 14 CTR (P & H) 92 (sic) ; Sohinder Singh and Bros. v. CIT [1980] 121 ITR 834 (P & H) ; CIT (Addl.) v. Sawan Motor Stores [1977] 109 ITR 660 (AP) CIT v. S. P. Bhatt [1974] 97 ITR 440 (Guj) ; CIT v. Vinay Chand Harilal [1979] 120 ITR 752 (Guj) and Khemka and Co. (Agencies) Pvt. Ltd. v. State of Maharashtra, AIR 1975 SC 1549 ; 35 STC 571 and hence unsustainable ? As in the instant case, where the estimated addition regarding unexplained investments, is bifurcated and spread over a period of years is any penalty under section 271(1)(c) of the Act exigible ? Does not the reasoning and conclusion of the Appellate Tribunal militate against the ratio of the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ruction as estimated by the assessee. According to the first report dated March 19, 1965, the cost of construction incurred till that date came to Rs. 2,60,000 and estimated the cost of construction of the building alone at Rs. 5.58 lakhs and also certified that the total cost of construction would be about Rs. 7.33 lakhs. The Corporation on the basis of the said report, sanctioned a loan of Rs. 4,00,000 on June 19, 1965. As per clause 13 of the indenture executed by the assessee in favour of the Corporation, true and regular accounts were to be maintained by the assessee and duly audited, and such audited annual statements were to be forwarded to the Corporation within six months. On the basis of the periodical statements submitted by Sri K. B. Menon, the Corporation had paid the entire loan amount sanctioned. Sri K. B. Menon had also conducted inspection in regard to the expenditure for the period from July 23, 1966, to September 5, 1966, and the additional constructions and fittings during this period were valued at Rs. 53,463. The ledger shows that Rs. 95,846 had been spent from September 6, 1966, to November 3, 1966, placing the total cost of construction according to these re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resaid question to this court in Income-tax References Nos. 76, 77 and 78 of 1975 by judgment dated November 11, 1977, this court after due consideration of the entire matter answered the question in the affirmative and in favour of the Department. In the referred case, this court was of the view that the valuation of the cost of construction and determination of the undisclosed income are essentially questions of fact and it is somewhat difficult to find out a question of law in the process. But counsel for the assessee submitted that there was a total inadvertence to certain material aspects of the evidence and that this would justify this court calling for a supplemental statement of the case from the Tribunal. It was submitted before this court that the assessee had produced a certificate of Vellappally Bros., marked as annexure-- ' M ' in that case. But the Tribunal did not refer to the said certificate in the appellate order. With reference to the said submission made on behalf of the assessee, this court considered the matter and observed as follows : " But it is seen that this report (annexure--' M ') was filed only before the Income-tax Appellate Tribunal. We do not know ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther observed that whatever be the purpose of inflation, on an examination of the details of the estimate furnished and a perusal of the on-the-spot study and reports, the Tribunal had worked out the cost of construction, on the basis of which, it proceeded to tax the assessee. This court further held that no question of law arises from the course pursued by the Tribunal. On the basis of the additions made by the Income-tax Officer an confirmed by the Appellate Assistant Commissioner, the Inspecting Assistant Commissioner of Income-tax initiated penalty proceddings under section 271(1)(c) read with section 274(2) of the Income-tax, 1961, for the assessment years 1966-67, 1967-68 and 1968-69. The Inspecting Assistant Commissioner rejected the contention of the assessee regarding the imposition of penalty on the ground that the addition made by the Income-tax Officer is on a sound basis. It was also observed that the said addition made by the Income-tax Officer was confirmed by the Appellate Assistant Commissioner. The Inspecting Assistant Commissioner, therefore, took the view that this is a case to which the provisions of the Explanation to section 271(1)(c) of the Act are attrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dentiary value of the certificate sought to be relied on by the assessee. In this connection, it will be advantageous to refer to the order of remand passed by the Tribunal. The Income-tax Appellate Tribunal after quoting the observations of this court regarding the reliance to be placed on the certificate issued by Vellappally Bros. in Income-tax References Nos. 76, 77 and 78 of 1975 stated thus : " It is trite law that the assessee is entitled to rely on evidence not relied on in assessment proceedings in penalty proceedings. The assessee has relied on this certificate before the Inspecting Assistant Commissioner in penalty proceedings and the Inspecting Assistant Commissioner has not discussed the same. There is, therefore, no question of our admitting any fresh evidence if we ask the Inspecting Assistant Commissioner to examine the certificate with reference to the contentions of the assessee. We consider it necessary that the Inspecting Assistant Commissioner should examine this certificate (copy annexed) and hear the assessee on the submissions that the assessee has to make on it. It would be also open to the Inspecting Assistant Commissioner to make such enquiries as he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reports submitted by Sri K. B. Menon were found to be defective on material points, could there arise a case for examining the question of savings pointed out by Vellappally Bros. in their report ". It is with this observation in mind that the Inspecting Assistant Commissioner proceeded to consider the veracity of the certificate issued by Vellappally Bros. with reference to the report submitted by the Executive Engineer (Valuation) and the original estimate submitted by Vellappally Bros. The Inspecting Assistant Commissioner, after referring to the various discrepancies in the certificate issued by Vellappally Bros. came to the conclusion that the certificate issued by Vellappally Bros. has little evidentiary value in the ascertainment of any savings in the construction of the building with reference to the original estimate dated Novemher 16, 1964. After obtaining the remand report, the Income-tax Appellate Tribunal proceeded to consider the matter on the merits. In paragraph 15 of the appellate order, the Income-tax Appellate Tribunal has noticed the fact that the Inspecting Assistant Commissioner had referred the matter to the Executive Engineer, (Valuation) who was given a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings of Rs. 2,73,151 according to the certificate Rs. 58,322 are to be found as probable savings in foundation. This we have established conclusively is not acceptable. The plea that there could be savings for contractor's profit which is the other large amount of Rs. 1,10,000 is a general one and was considered by the Tribunal in paragraph 12 of its order in quantum proceedings where they had categorically stated that no evidence was available to support the plea and further had pointed out how the Income-tax Officer had shown to the assessee that certain figures given were erroneous. We have to state that Sri K. B. Menon, a retired chief engineer of the Kerala Government came to the scene after the foundation stage had been completed and was submitting periodical reports to the Corporation dated March 19, 1965, November 11, 1965, March 30, 1966, and July 23, 1966, and he had corroborated the claims regarding the expenditure spent from time to time. As observed by the Tribunal there was no warrant to assume that Sri K. B. Menon was also acting in collusion with the assessee and furnishing highly inflated figures to the Corporation and as a matter of fact the Tribunal stated that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed and merely because there are subsequent returns, where also the omission may continue, it does not alter the date of concealment. In support of the said view, the Income-tax Appellate Tribunal referred to various decisions of the other High Courts also. The Income-tax Appellate Tribunal finally considered the question regarding the quantum of penalty to be imposed for these three years. On a consideration of the facts and circumstances of the case, the Income-tax Appellate Tribunal took the view that the imposition of minimum penalty would meet the requirements of the case. Accordingly, the Appellate Tribunal ordered that for each of the assessment years 1966-67 and 1967-68, the penalty to be imposed should be computed at 20 per cent. of the difference in tax between that on the income as finally assessed and that on the income as originally returned. For the assessment year 1968-69, the Appellate Tribunal directed imposition of penalty equal to the income concealed at Rs. 47,270. Thereafter, the assessee moved the Income-tax Appellate Tribunal to refer certain questions of law said to arise out of the appellate order dated March 26, 1980, and that is how the Appellate Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... soning and conclusion of the Appellate Tribunal for sustaining the said orders are wholly erroneous in law and unreasonably wrong. Mr. P. K. R. Menon, on the other hand, submitted that in the quantum proceedings, it has been finally decided that the assessee had spent a sum of Rs. 2,60,000 in the construction of the additional building by way of unaccounted investment and the said amount was included in the income of the assessee under section 69 of the Act for the years 1966-67, 1967-68 and 1968-69, that since as a result of these additions, the returned income for the above assessment years was far below 80 per cent. of the assessed income, the Explanation to section 271(1)(c) of the Act is automatically attracted and a presumption is raised against the assessee that the assessee is guilty of fraud or gross or wilful neglect as a result of which he has concealed the income, that though the said presumption is a rebuttable one, the assessee failed to discharge the said burden and that the Tribunal on a consideration of the entire materials available on record had found that there is no reason to take a different view from that taken in the quantum proceedings. Learned counsel als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 271(1)(c) read with the Explanation as it stood after the amendment by the Finance Act, 1964, with effect from April 1, 1964, the relevant portion reads as follows : "271. Failure to furnish returns, comply with notices, concealment of income, etc. --- (1) If the Income-tax Officer or the Appellate Assistant Commissioner, in the course of any proceedings under this Act, is satisfied that any person-... (c) has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty.--- ... Explanation.---Where the total income returned by any person is less than 80 per cent. of the total income (hereinafter in this Explanation referred to as the correct income) as assessed under section 143 or section 144 or section 147 (reduced by the expenditure incurred bona fide by him for the purpose of making or earning any income included in the total income but which has been disallowed as a deduction), such person shall, unless he proves that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part, be deemed to have concealed the particulars of his inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y any person is less than 80 per cent. of the total income as assessed, such person, unless he proves that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part, will be deemed to have concealed the particulars of such income or furnished inaccurate particulars of such income. Proceeding on the basis that the income returned by the assessee is less than 80 per cent. of the total income as assessed, it should be stated that the assessee should initially prove that the failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part. Unless it is so shown, the assessee shall be deemed to have concealed the particulars of the income or furnished inaccurate particulars of such income. It is only a presumption. The burden is cast on the assessee to prove a negative fact. This can be discharged either by independent evidence led during the penalty proceedings or by a close scrutiny or appraisal of the existing facts and data available. This will take in even the materials available at the assessment stage. The presumption under the Explanation to section 271(1)(c) can be displaced by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome within the mischief of the section and suffer the imposition of penalty. That is the effect of the provision." Again at page 21 of the report, the Supreme Court after considering the decision of the Punjab and Haryana High Court (Full Bench) in Vishwakarma Industries v. CIT [1982] 135 ITR 652 proceeded to observe as follows : " Once the Explanation is held to be applicable to the case of an assessee, it straightaway raises three legal presumptions, viz., (i) that the amount of the assessed income is the correct income and it is in fact the income of the assessee himself ; (ii) that the failure of the assessee to return the correct assessed income was due to fraud ; or (iii) that the failure of the assessee to return the correct assessed income was due to gross or wilful neglect on his part. But it must be emphasised that these are presumptions and become a rule of evidence but the presumptions raised are not conclusive presumptions and are rebuttable. We are of the opinion that the view of the Full Bench of the Punjab and Haryana High Court is a correct view when it states that it only makes a presumption but the presumption is a rebuttable one and if the fact-finding body ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it in respect of a year subsequent thereto. New materials may produce a change of approach ; the old materials themselves, on a more careful or intelligent analysis, may effect the same result...." The very same question again came up for consideration before the Supreme Court in the context of the Explanation as it stood at the relevant period in CIT v. K. R. Sadayappan [1990] 185 ITR 49 and the Supreme Court applied the principles laid down in its earlier decision reported in CIT v. Mussadilal Ram Bharose [1987] 165 ITR 14. The matter regarding imposition of penalty again came up before the Supreme Court in CIT (Addl.) v. Jeevan Lal Sah [1994] 205 ITR 244, where the question was as to whether the Tribunal was right in holding that no penalty could be imposed with reference to the cash deposits on the principle of Anwar Ali's case [1970] 76 ITR 696 (SC) even after the amendment of section 271 in 1964. The Supreme Court after quoting the Explanation and the provisions of section 28(1)(c) of the Indian Income-tax Act, 1922, considered the question whether the principles laid down by the Supreme Court in Anwar Ali's case [1970] 76 ITR 696 rendered under the provisions of the 1922 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said amendments by the Finance Act, 1964. Not only the word ' deliberately ' was omitted in clause (c), but the Explanation aforestated was added. The Explanation creates a presumption of law--which is no doubt rebuttable. The presumption of law created by the Explanation is to the following effect : where the total income returned by any person is less than 80 per cent. of his total assessed income, such person shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income for the purposes of clause (c) unless he proves that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part. The Explanation, thus, shifts the burden of proof to the assessee in the situation covered by it. Once the returned income is shown to be less than 80 per cent. of the total income assessed, the presumption comes into play and then the burden shifts to the assessee to establish that his failure to return the correct income was not on account of any fraud or gross or wilful neglect on his part. If he fails to establish the same, the presumption will become a finding--and it would be open to the au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng that not only the explanation was not convincing but false because there was no cash available to the assessee for payment of the extra money paid. Therefore, no explanation was put forward as to wherefrom the extra money came. If that was the position and the further presumption was that the assessee was guilty of fraud, then the subsequent presumption followed that the assessee has concealed the income and that can be rebutted only by cogent and reliable evidence. No such attempt in this case was made. In that view of the matter, in our opinion, it cannot be said that, in this case, the Tribunal was justified in rejecting the claim and penalty may be imposed. The presumption raised as aforesaid, that is to say, that the assessee was guilty of fraud or wilful neglect as a result of which the assessee has concealed the income, would be there. This presumption could have been rebutted by cogent, reliable and relevant materials. There was none, at least neither the Tribunal nor the High Court has indicated any. If that is the position, the High Court, in our opinion, was in error in not correctly applying the principles laid down by this court in CIT v. Mussadilal Ram Bharose [198 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e building, and that as per the said accounts so maintained, the actual expenses incurred for the construction of the said building came to Rs. 6,07,133. The assessing authority, namely, the Income-tax Officer, found that the estimate submitted by Vellappally Bros. and the report submitted by Sri K. B. Menon showed a higher amount, namely, Rs. 7.33 lakhs and Rs. 8,52,359, respectively, and assumed that the assessee had invested more amount than what is shown in the accounts for the purpose of the additional construction and he took the difference between the cost of construction as reported by Sri K. B. Menon and the actual amount shown in the accounts, in this case Rs. 3,00,000 as the unaccounted income of the assessee and apportioned the amount for three years under consideration in the ratio 2 : 7 : 2. Notwithstanding the fact that the assessee by way of explanation to the proposed addition of Rs. 3,00,000 submitted a valuation report by one, Sri Zacharia, an engineer, he rejected the said report as perfunctory and one made long after the construction of the building, and added the same as the undisclosed income of the assessee for the aforesaid three years. These orders of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 151 and that the certificate produced before the Inspecting Assistant Commissioner was not considered by him in the penalty proceedings, the Appellate Tribunal, according to us, has rightly thought that instead of admitting the said certificate as additional evidence in the appeal and considering the same, it is proper that an opportunity is given to the Inspecting Assistant Commissioner to examine the veracity or the correctness of the certificate issued by Mr. Alexander Vellappally after conducting proper enquiries in the matter and has called for a report. But pursuant to the remand order, the Inspecting Assistant Commissioner had submitted a report, accompanied by the report of the executive engineer, valuation. What the Appellate Tribunal directed the Inspecting Assistant Commissioner to do was to find out whether there are materials to support the certificate issued by Mr. Alexander Vellappally. We find from the discussion in the appellate order, which we have already set out earlier in this judgment, that the Appellate Tribunal has referred to the report of the executive engineer, valuation, and the observations made by him in regard to the certificate issued by Vellappally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wood. In the report submitted by Shri K. B. Menon, the value of door frames and window frames and ventilators were taken only at Rs. 9,250. It is admitted that frames were made mostly of teak and that only the shutters were made of anjili wood, Shri K. B. Menon, is found to have made the valuation on actual verification." These observations of the Inspecting Assistant Commissioner also dilute the credential of the report of Shri K. B. Menon which according to the authorities and the Tribunal represents gospel truth. We have already set out the provisions of section 271(1)(c) read with the Explanation thereto introduced with effect from April 1, 1964, by the Finance Act, 1964, as applicable to the assessment years in question and also the legal principles governing the situation. To recapitulate for the purpose of this case, in a case where the returned income is below 80 per cent. of the assessed income, the provisions of the Explanation are automatically attracted and a presumption against the assessee is drawn to the effect that he has concealed the particulars of income or that he has furnished inaccurate particulars of income warranting imposition of penalty. It has at once ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mate but not executed and also took into account only the value of the materials actually used for arriving at the estimate. These facts are as clear as the day light. Thus, the materials furnished by the report of Shri K. B. Menon, the certificate of Vellappally and the report of the Executive Engineer (Valuation Cell) of the Department all point to the fact that the construction was at variance with the original estimate. Now, when we consider the question as to whether the assessee had discharged the burden cast on it to establish that the non-furnishing of the correct income is not on account of any fraud, gross or wilful neglect, we have to hold that there were abundant materials on record in the penalty proceedings to establish that there was no fraud, gross or wilful neglect on the part of the assessee and that the assessee had discharged the burden cast on it. We are of the view that the Income-tax Appellate Tribunal had also very lightly brushed aside the report of the Executive Engineer (Valuation) of the Department which supports the certificate of Vellappally Bros. and doubts the credentials of the report of Shri K. B. Menon as also probabilises the correctness of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent continues to be on the Revenue. Our answer to the said question is to the effect that the burden is on the assessee to establish the ingredients of the Explanation. In view of our finding on the first limb of the question, it is unnecessary for us to decide the third limb of the question. Now coming to the question referred to at the instance of the Department, though it is unnecessary to decide the said question in view of our answer to the question referred to at the instance of the assessee, it has been brought to our notice that the said question is concluded by the decisions of the apex court in Brij Mohan v. CIT [1979] 120 ITR 1 and in CIT v. Onkar Saran and Sons [1992] 195 ITR 1 against the Revenue and in favour of the assessee to the effect that the penalty under section 271, if any, has to be levied with reference to the law applicable as on the date of the original return and not based on any subsequent returns. We, accordingly, hold so. We make it clear that the orders of the Inspecting Assistant Commissioner (annexures " A-1 " to " A-3 ") and the appellate order of the Income-tax Appellate Tribunal (annexure " B ") shall stand quashed and set aside. We order accor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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