TMI Blog1999 (8) TMI 107X X X X Extracts X X X X X X X X Extracts X X X X ..... e salient features noticed by the Assessing Officer in the course of assessment proceedings with regard to these transactions with the sister concerns may be briefly enumerated as under: (a) Out of the total sales of the firm amounting to Rs. 18,98,928, sales to the extent of Rs. 11,10,548 have been made to three sister concerns viz., M/s. Patel Chemical Industries (abbreviated as 'PCI'); M/s. Patel Laboratory Furnishers (abbreviated as "PLF") and M/s. Harsidh Chemical Industries (abbreviated as "HCI"). (b) The price charged was considered to be lower than the prevailing market price. (c) The sister concerns in turn had sold the goods to third parties on the same date and in the same quantity but at a higher price. (d) The delivery of the goods was made directly by the assessee to third parties whereas sales to the sister concerns were merely paper transactions. (e) The method of accounting adopted to affect the sales was first of all to prepare bill in the name of a sister concern and simultaneous preparation of another bill of the said sister concern to the third party. Thereafter, the delivery of the goods was affected to the third party from the assessee's factory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer observed that the transactions made by the assessee with the sister concerns are sham and bogus and profits amounting to Rs. 1,61,078 had been diverted to the sister concerns and the assessee has thus concealed the particulars of income. The assessee furnished written submissions in response to the aforesaid show-cause notices on 15-3-1989, 8-8-1989 and again on 22-8-1989. The assessee's letter dated 22-8-1989 is placed at page 8 of the paper book filed before us. The Assessing Officer considered the submissions made during the course of penalty proceedings and proceeded to levy the impugned penalty of Rs. 2,12,332 for concealing the particulars of income under section 271(1)(c) of the Act. 4. Aggrieved with the order of the Assessing Officer, the assessee preferred an appeal before the CIT(A). The CIT(A) vide impugned order dated 26-2-1993 has considered the written submissions filed during the course of proceedings vide letters dated 25-3-1992 and 22-6-1992 and proceeded to confirm the penalty, The relevant observations of the CIT(A) are reproduced as under: "Therefore, we have to examine the facts of this case and apply the law as it existed at the relevant time. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment year 1982-83 and therefore the Tribunal while confirming the addition has followed its earlier order for assessment year 1981-82. The relevant portion of the Tribunal's order for assessment year 1981-82 reads as under : "7.1 An appraisal of the present facts clearly shows that the firm has adopted a well device system of effecting sales to its sister concerns at a price substantially lower than the prevailing market price. It has also been established by the ITO and in fact not contradicted before us by the learned counsel that all the transactions have been affected under the same roof and by the same set of persons representing one firm or the other. The ITO has also established that only book entries were being affected by the various concerns although in fact the entire sale transaction was carried out by the assessee firm including the delivery from its own premise. It is also seen that sales are effected on the same day for a like quantity by the assessee firm as well as in the sister concerns and the only change in the name of the customer on the bill book of the sister concern and the change in the sale price. A perusal of the chart which we have repro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 68] 67 ITR 11 (SC) which held the field when the return was filed by the assessee. In A. Raman Co.'s case it has been held that the avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. On this basis the ld. counsel submitted that the legality of the transactions with the sister concerns can not be challenged by the Revenue and therefore the diversion of profits by routing the sales through the sister concerns is legally permissible. 6.1 The ld. counsel next argued that the decision of the Tribunal confirming the quantum additions are not binding for the purpose of levy of penalty under section 271(1)(c). The ld. counsel next assailed the impugned penalty on the ground that the Assessing Officer has taxed the profits in the hands of the sister concerns. Therefore, the genuineness of the sales made to the sister concerns cannot be doubted in the case of the assessee firm. The ld. counsel submitted that the approach of the Revenue in making additions on the ground of diversion of profits to the sister concerns and again assessing the same profits in the hands of the sister concerns leads to double taxation and therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n - --- has concealed the particulars of his income; OR --- has furnished inaccurate particulars of such income. The expressions "has concealed the particulars of income" and "has furnished inaccurate particulars of income" have not been defined either in the section or elsewhere in the Act. It is quite obvious that in the former situation the keeping of certain portion of income is directed whereas in the later situation it may be indirect. In furnishing the return of its income the assessee is required to furnish particulars and accounts on which such returned income has been arrived. These may be particulars as per the books of account. Inaccuracy made in such books of account which resulted in keeping off or concealing a portion of his income would be liable to be penalized as furnishing inaccurate particulars of income. The assessee may in such a situation also be construed as having concealed the particulars of its income inasmuch as a portion of his income has been kept off of the return by him. Both the offences thus in most situations may be overlapping. In the instant case before us, we find that the Assessing Officer has recorded in the assessment order dated 30- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r has indicated that the penalty under section 271(1)(c) is proposed to be levied for concealing the particulars of income represented by diversion of profits through sham transactions with the sister concerns. No prejudice therefore, has been caused to the assessee in the matter of rebutting the case against it. The contention of the ld. counsel for the assessee is therefore without merit and is dismissed. 8.1 The decision of the Gauhati High Court in the case of Padma Ram Bharali v. CIT [1977] 110 ITR 54 relied upon by the ld. counsel in support of his contentions is clearly distinguishable. In the said case the facts were that initiation of penalty proceedings was for concealment of particulars of income. The High Court held that the Tribunal finally sustained the penalty on an entirely different ground which involved invoking the deeming provisions contained in the Explanation and the Tribunal held that the assessee would be deemed to have concealed the particulars of income or to have furnished inaccurate particulars of income. The issue before the Gauhati High Court thus involved invocation of Explanation to section 271(1)(c) for sustaining the penalty. In so far as the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turn over shown is Rs. 10,39,828 which include paper sales of Rs. 9,53,501 in respect of transactions routed through this intermediary. These facts provide irrefutable evidence that the transactions with the sister concerns are merely a ruse to divert the profits. In fact the sale transactions of the assessee with the sister concerns and the subsequent transactions of the sister concerns with the outside parties form an integral and indivisible part of the composite scheme of tax planning of the assessee. The decision in the case of McDowell Co. Ltd., which is a locus classicus in the field of tax jurisprudence, squarely applies to the facts of the case. This is a landmark judgment rendered by Five Judges Bench of the Supreme Court and makes a radical departure in the approach to tax planning schemes from the days of A. Raman Co.'s case. The Supreme Court held that the colourable device can not be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. Their Lordships observed at page 161 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... still holds the field and is binding on us. The principles laid down by the McDowell have been followed by the Gujarat High Court in the case of CIT v. Smt. Minal Rameshchandra [1987] 167 ITR 507/30 Taxman 282 and it has been held that where a device has been adopter to evade tax, the Court is entitled to unravel the device. The Court Must examine the substance of the transaction and then decide whether the transaction is such that the judicial process may accord approval to it. 9. Applying the aforesaid principles laid down by the Supreme Court and reiterated by the Gujarat High Court, it was the bounden duly of this Tribunal to unravel the tax saving device adopted by the assessee and to determine the true character of the transactions. 10. In the totality of the facts and circumstances of the case, we have no hesitation in holding that the assessee firm has adopted non-genuine and artificial device of showing paper transactions with the sister concerns with the objective of reducing its tax liabilities. These transactions are commercially inert and have been entered into as part of tax saving scheme. The penalty for concealment levied under section 271(1)(c) is therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an ingredient of the offence and it lays down only a rule of evidence. The Explanation does not confer any discretion on the Assessing Authority to invoke it or not. It automatically applies to cases where penalty proceedings under section 271(1)(c) for the offence of concealing the particulars of income have been initiated. The consequences from the applicability of Explanation 1 follow as a matter of law. If the assessee fails to offer Explanation OR the Explanation is found to be false or the assessee is not able to substantiate the Explanation, the presumption that he concealed the particulars of income is bound to be drawn. In the instant case we find no infirmity in the order of the CIT(A) in invoking the Explanation for the purpose of considering the exigibility of the penalty under section 271(1)(c). In support of our view reliance is placed on the decisions of the Punjab and Haryana High Court in the cases of CIT v. Rajeshwar Singh [1986] 162 ITR 173/26 Taxman 439 and CIT v. Simco Auto India [1989] 179 ITR 265/[1990] 49 Taxman 270. In Shri Rajeshwar Singh's case, the ITO did not invoke the Explanation for levying penalty for concealment of income and the AAC also did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he other High Courts like Punjab Haryana, Orissa, Allahabad and Gujarat High Court is in favour of the Revenue. At this juncture it would be relevant to mention here that we had invited attention of the ld. counsel for the assessee to the aforementioned decisions of the High Courts. The contention of the ld. counsel against the invocation of the Explanation by the CIT(A) for sustaining the penalty, is therefore rejected. 16. The ld. counsel next assailed the invocation of the Explanation on the ground that Explanation 1 can be invoked "in respect of any facts material to the computation of the total income" and not in respect of addition of Rs. 1,61,018 made on account of diversion of profits to the sister concerns. The contention of the ld. counsel is, in our opinion, without any substance and is liable to be rejected. Explanation 1 clearly envisages that once the Explanation is applied, "the amount added or disallowed in computing the total income would be deemed to represent the income in respect of which particulars have been concealed." 17. Applying Explanation 1 to the facts of the instance case, the explanation of the assessee is to be examined by applying the test o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in the hands of the assessee firm and on this ground penalty, according to the ld. counsel, cannot be sustained under section 271(1)(c). In our considered opinion the plea based on the concept of double taxation, suffers from an inherent infirmity inasmuch as it proceeds on the erroneous presumption that the Revenue is debarred from assessing the income belonging to the assessee in the hands of the assessee on the ground that the said income has been declared by another person and the same has been assessed by the Assessing Officer. It is well established by various judicial pronouncements of the Hon'ble Supreme Court as well as the other High Courts that when an assessee shows certain income in his return, the Revenue does not act in consistently if it accepts the return of that assessee on its face value and at the same time tax that income in the hands in which it ought really to be taxed. Reference in this context may be made to the decisions of the Supreme Court in Jamnaprasad Kanhaiyalal v. CIT [1981] 6 Taxman 61/130 ITR 244, ITO v. Rattan Lal [1984] 145 ITR 183/16 Taxman 25 and ITO v. Bachu Lal Kapoor [1966] 60 ITR 74. The Apex Court observed in the case of ITO v. Ch. A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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