TMI Blog1986 (12) TMI 51X X X X Extracts X X X X X X X X Extracts X X X X ..... (Appeals) erred in sustaining the penalty imposed to the above extent as the Commissioner (Appeals) has misdirected himself in holding that the assessee claimed expenses which were of personal nature which amounted to fraud, gross or wilful neglect in furnishing the return of income. It is also the contention of the assessee that merely on the fact that the assessee's explanation was not found satisfactory, it cannot be held that the assessee had concealed part of the income for penalty purpose and that without any positive evidence bringing home the penalty to the assessee, the Commissioner (Appeals) has partly sustained the order of the ITO. It is also the appeal by the assessee that existence of mens rea or guilty intention has not been shown or established by the authorities below. It is submitted that the Commissioner (Appeals) has thereby violated the principles of natural justice as the penalty imposed in such item was not valid and proper on the facts and in the circumstances of the case. It is submitted by the assessee's learned counsel that actually there was no justification for the Commissioner (Appeals) for changing the figures of the various items of disallowances whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be dated 15-12-1980. 6. The assessee filed appeal before the Commissioner (Appeals), who heard the assessee's learned counsel as well as the ITO concerned, who appeared on behalf of the department. Before the Commissioner (Appeals) the assessee filed a written explanation, copy of which was sent by him to the ITO for his comment, which was received and copy of which again was sent to the assessee. The Commissioner (Appeals) heard both the sides at length. The assessee's learned counsel contended that the computation of penalty was absolutely incorrect as the ITO has taken into account the loss shown in the return at Rs. 9,89,905 whereas the total loss of Rs. 4,66,478 being the income assessed. It was, however, pointed out that in ascertaining 20 per cent difference for the purpose of the Explanation, the loss of the earlier years brought forward should not be taken into account. It was clarified that the loss of Rs. 9,89,905 included the loss shown for the year at Rs. 1,62,255. It was urged that the ITO went wrong in taking into account the loss brought forward from the earlier years for the purpose of the present proceedings. The Commissioner (Appeals) agreed with the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hy the ITO considered that the assessee had committed fraud, etc., in respect of those items of additions sustained. It was urged that no new evidence was produced and all the additions have been thoroughly discussed in the assessment order and in the order of the appellate authorities. The Commissioner (Appeals) found that no entries have been made in the order sheet for the year to show that the ITO had fixed the hearing of penalty on 24-10-1980 and whether anybody appeared on that date. He also observed that even the ITO's covering letter sending the matter to the IAC for approval was not on record and in the circumstances it was not possible to verify whether the assessee had applied for adjournment or not. The Commissioner (Appeals) considered the facts of the case and the development after the assessment and he was of the view that the provisions of the Explanation to section 271(1)(c) clearly were applicable, and, therefore, the onus was on the assessee to prove that there was no fraud, gross or wilful neglect on the part of the assessee in not furnishing correct return of its income. In this connection, reference was made to a number of decisions of the Hon'ble Allahabad Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estimate the assessee's production." 10. It was argued on behalf of the assessee that the yield percentage cannot, in the circumstances of the case be uniform, depending on a number of variable factors. It was stated that the assessee had shown that during the year most of the groundnut was purchased from Hardoi and Lakhimpur Kheri Districts and the quality of groundnut obtained from these areas was inferior, which resulted in lower production as compared to the earlier years. The assessee relied on certificate of oil expert and other association as placed before the Commissioner (Appeals). 11. In respect of the addition, it was contended that mens rea and mala fide intention cannot be attributed and, therefore, in respect of such items, no penal action could be taken. It was also urged that the addition was sustained by rejecting the books of account and applying provisions to section 145(2) of the Act, as held by the Tribunal in para 30 of the said order. It was stated by the Tribunal in that order that the numerous mistakes and discrepancies pointed out by the ITO in the assessee's production register, had not been denied by the assessee and that such mistake would, however, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of fraud or gross or wilful neglect as alleged. It was, therefore, submitted that the penalty may be deleted entirely. 13. On behalf of the revenue, it was urged that before the ITO, the assessee had failed to show cause in response to the show-cause notice issued under section 271(1)(c) and in fact there was no compliance. The department was also relying on the decisions of different High Courts, to stress that the penalty on the facts of the case was correctly levied. The assessee concerned submitted a written explanation which was considered by the Commissioner (Appeals). It was stressed that there were numerous cuttings and overwritings in the register and additions on both sides of page 26 of the production register. It was also pointed out that subsidiary records on which entries or alterations were made, had not been produced before the ITO and, therefore, the manipulations noticed by the ITO stand proved. Reference was made to the observation of the Tribunal in the quantum appeal at para 16 of the said order, in which it has been mentioned that the production register which has been commented upon by the ITO and the AAC, was also produced before the Tribunal and after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finding of suppression or production because if that was so, then only additions relating to such suppression or production would have been sustained. As pointed out earlier, he noted that the addition was substantially reduced by the appellate authorities and that too on estimate basis. It was stated also that the Appellate Tribunal accepted the yield of oil at a certain percentage after making certain adjustment, which fact would go to show that in the ultimate analysis the additions have been sustained on account of low yield and supported by discrepancies in the accounts, and there was a case of rejection of accounts which have not been properly maintained. It was stated before the Commissioner (Appeals) that there had been clerical mistakes in the records by the staff, which would not, however, mean that there was fraud or gross or wilful neglect on the part of the assessee, as the accounts were audited and no serious defects were pointed out by the audit, more so, when the accounts were scrutinised by the excise department. 15. The Commissioner (Appeals) considered the various submissions made before him and he found that the contentions of the assessee was valid. He refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und to be lacking in this case. 16. The Commissioner (Appeals) also considered the various decisions relied on by the ITO before him. He went through the ratio of those decisions, but he found that none of them supported the view that where account books were rejected and income was estimated, penalty would be leviable. He, therefore, concluded that the deletion of Rs. 1,67,195 sustained in the groundnut and khali account by the Tribunal would not tantamount to any fraud or gross or wilful neglect on the part of the assessee. He found that the decisions relied on by the assessee support the case of the assessee fully. He, therefore, directed that no penalty would be leviable on this addition. 17. The revenue has come up in respect of the above deletion. The addition of Rs. 54,120 had not been sustained in soap account. Similar contentions were raised in respect of this account also on behalf of both the sides. 18. The Commissioner (Appeals) considered the matter afresh and noted that the addition in soap account was more on consideration of technical details and certain assumptions resorted to by the ITO, the learned AAC as well as by the Tribunal rather than on bringing out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een able to show any reasonable explanation or any preponderance of probabilities as to why this expenditure was claimed as business expenditure when it was clearly for the directors' personal expenses. 20. Similarly in respect of the general expenses, car expenses, disallowances out of stock account, the Commissioner (Appeals) was of the view that the assessee had failed to discharge the onus cast by the Explanation to section 271(1)(c) and, therefore, penalty would be attracted in respect of such items. 21. In respect of the travelling expenses, the Commissioner (Appeals) noted that the appellate authorities confirmed the additions which, however, show that the disallowance was for the reason that there were no vouchers and the purpose of the journeys was not known. He had, therefore, held that no penalty was leviable in respect of these items. Accordingly, the Commissioner (Appeals) sustained the penalty relating to those similar items as mentioned above and deleted the penalty relating to groundnut and khali account and soap account. Hence, the appeal by the revenue against the deletion and the appeal by the assessee against the retention of part of the penalty. As noted ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee also submitted that the ITO who initiated the penalty proceedings, referred the matter to the concerned IAC as per the provisions of section 274(2) of the Act, which was subsequently amended. It is urged, therefore, that the ITO once correctly referred the matter to the IAC, would not get back that jurisdiction so as to empower him to pass the penalty order as done in the instant case. It is pointed out that relevant changes in the section have been brought out with effect from 1-4-1976. It is stressed before us that in the return the assessee has shown loss and such loss was reduced as per order of the appellate authorities and in such circumstances no penalty was called for. In this connection, the assessee's learned counsel referred to the decision in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC), in order to stress the claim that if there were two possible interpretations, the view that was favourable to the assessee should be adopted. In this context, it is urged that the Commissioner (Appeals) has referred to the relevant observations and findings of the Appellate Tribunal in the quantum appeal in which according to the assessee's learned counsel, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that the disallowances which were considered by the Commissioner (Appeals) as concealed income for the present purpose were only made on estimates. It is urged that the claim may have been made wrongly but that would not justify imposition of penalty. The assessee's learned counsel refers to the various pages of the paper book in order to stress his point. In short, it is urged that the penalty in respect of these disallowances as per order of the Commissioner (Appeals) in the penalty appeal, cannot be sustained. 25. On the other hand, the learned departmental representative supports the order of the Commissioner (Appeals). It is submitted that in the first instance there was no dispute that the ITO had initially and legally initiated the penalty proceedings which were referred to the concerned IAC and the penalty was imposed after observing the legal requirements and as such the order of the Commissioner (Appeals) in respect of the penalty order required to be sustained. Reference is made to the decision of the Hon'ble Allahabad High Court in the case of CIT v. Om Sons 1978 Tax LR 922. It may be pointed out here that the assessee's learned counsel has referred to the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss or wilful neglect on the part of the assessee, which in the instant case, the assessee had failed to discharge. It is also submitted that the disallowances had been sustained even by the Appellate Tribunal in the quantum appeal and, therefore, the application of the proviso to section 271(1)(c) cannot be challenged. 26. We have heard both the sides at length and we have gone through the orders of the authorities below for our consideration. It is seen that the ITO did make disallowances in respect of the various items of expenses claimed by the assessee to have been incurred for the purpose of his business, which were found by the ITO as well as by the appellate authorities to be not so. Of course, the ITO disallowed a higher amount while the appellate authorities reduced such disallowances as discussed briefly in the earlier paragraphs. We have gone through the various authorities cited by both the sides for our consideration. In our opinion, the fact that the addition was made on estimate, would not be sufficient to say that the provisions of the Explanation were not attracted. In fact, in the instant case, it has been found before the ITO that no response was made and no sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Commissioner (Appeals) for changing the figures adopted for the present purpose. Reference is made to the decision in Kedar Nath Sanwal Dass's case in order to stress the claim that there was a finding in the assessment proceedings and appellate proceedings that the claim made by the assessee was false and on that basis alone the materials were sufficient for imposition of penalty. Reference is made to another decision in Rajpal Automobiles v. CIT [1979] 116 ITR 436, decided by the Hon'ble Allahabad High Court, in which one item of income was not shown in the return and no explanation was offered and that the claim that the omission was due to the assessee's illiteracy was not accepted. It is pointed out that in the present case also the assessee did not furnish any explanation to the ITO when called upon to do so and, therefore, there was no presumption that the ITO acted on surmises only. It is stressed that when no explanation was furnished to the ITO, how can the assessee now come and claim that there was no concealment of income or there was no fraud or gross or wilful neglect on the part of the assessee when penalty had to be imposed by the ITO and at that stage. It is s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ught out the addition and which was conclusively sustained by the Tribunal though there was some relief. It is urged, therefore, that these facts would speak for itself and, therefore, the Commissioner (Appeals) made a mistake of fact and law in cancelling the penalty relatable to groundnut oil, khali and soap account. It is submitted, therefore, that taking the totality of the facts and in the circumstances of the case, keeping in view the decisions cited, and the submissions made before us, this part of the order of the Commissioner (Appeals) requires to be reversed and the appeal by the revenue may be allowed. 29. The learned counsel for the assessee, however, supports the order of the Commissioner (Appeals) so far as the deletion of the penalty amount relating to khali, groundnut oil, soap account, is concerned. It is urged that even before the ITO no explanation was filed, the appellate authorities would have to consider the assessee's explanation in order to ascertain whether penalty would lie. Reference is made to the decision of the Hon'ble Kerala High Court in V. Subramonia Iyer's case. According to the learned counsel, prior approval of the IAC concerned should have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finding that there was income which the assessee had earned, but had failed or had deliberately kept outside the books of account. It is submitted that it is not sufficient for the department to rely on the findings made in quantum appeal. It is urged that on the facts and in the circumstances of the case and in view of the findings of the Tribunal in quantum appeal as well as in the finding of the Commissioner (Appeals) in the penalty appeal impugned before us, the appeal by the revenue may be dismissed. 31. We have gone through the detailed facts of the case as noted in the orders of the authorities below as well as in the quantum appeal and the findings of the different authorities given therein. We have also gone through the different case laws cited before us by both the sides. We have also taken into account the contentions of both the sides for our careful perusal. At this stage, we have to refer again the portions of the Tribunal's decision in the quantum appeal as referred to in the impugned order as well as in the contentions by both the sides. At the outset, it has to be taken note of the fact that before the ITO the assessee has not furnished any explanation or shown ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee for which penalty was called for. The Commissioner (Appeals) considered the various decisions cited before him in coming to the conclusion that the assessee has discharged the onus cast by Explanation to section 271(1)(c) in respect of these accounts, that there was no fraud or gross or wilful neglect on the part of the assessee. According to the Commissioner (Appeals), once the onus was discharged, the onus shifts to the revenue to prove that there was fraud on the part of the assessee to conceal the income, etc. The Commissioner (Appeals) at para 31 of his impugned order amongst other things noted that the ITO referred to the non-production of subsidiary records, so that the real nature of these alterations could be seen. The Commissioner (Appeals) went through the various orders and according to him, though the additions sustained have been prompted by various difficulties pointed out in the production register, the additions so sustained have been entirely on estimates of production of different levels rather than on a positive finding of suppression of production anywhere. In our opinion, this observation of the Commissioner (Appeals) is not sustainable, as th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... books of accounts claimed to have been maintained, did not record production as found and noted by the Tribunal in the quantum appeal. 35. In view of the provisions of Explanation, the initial burden is cast on the assessee to show that there was no gross, fraud or wilful neglect on the part of the assessee. We have gone through the various submissions and other papers placed before us for oar consideration as well as the various decisions relied on by both the sides. We find that in view of the specific and factual findings given by the Tribunal, that the assessee in the penalty proceedings had not discharged the burden of proof cast on it and, therefore, the Commissioner (Appeals) went wrong in inferring and concluding that the assessee had discharged the burden cast by the above provision and, therefore, the burden of proof had shifted to the revenue to show that there was fraud or gross or wilful neglect on the part of the assessee. In this connection, we may refer to the decision in CIT v. Anantharam Veerasingaiah Co. [1975] 99 ITR 544 (AP) in which it has been held that intangible addition was made for which the explanation of the assessee had to be considered before tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court in the case of Addl. CIT v. M.Y. Chandragi [1981] 128 ITR 256 has taken the same view. 36. On the facts and in the circumstances of the case and on the materials available, we find that the ITO who passed the penalty order had at the time of passing the said penalty the jurisdiction to do so, although at the time when the penalty proceedings were initiated, the matter was referred to the concerned IAC as the minimum imposable penalty exceeded Rs. 25,000 as per the requirement of the section as it then was. The ITO in the penalty order has specifically mentioned that the penalty order in question was passed by him with the prior approval of the IAC concerned dated 15-12-1980. The order of the penalty was passed on 22-12-1980. It is not disputed before us that as on 22-12-1980, the ITO did not have jurisdiction to pass the penalty order. Keeping in view the decisions and the directions of the Hon'ble Allahabad High Court, as stated above, we are of the opinion that the ITO in the present case had jurisdiction to pass a penalty order. 37. We have discussed at length the various contentions made by both the sides. The ITO initiated the penalty proceedings, as according to h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessee, however, points out that the returned loss included loss brought forward from earlier years, whereas the loss returned for this year as noted by the Commissioner (Appeals) in the impugned order. It is submitted on behalf of the assessee that the Commissioner (Appeals) was correct in his approach so far as this aspect is concerned. On behalf of the assessee, however, it is urged that the assessee has filed the returned loss on proper verification and declaration and, therefore, the sanctity in the statement of the columns and, in fact, each of the columns would have to be taken cognizance of. We have given our careful consideration in this point also. It may be true that in the return the assessee has claimed higher amount of loss which was inclusive of the brought forward loss. But for the purpose of section 271(1)(c), penalty is imposable in respect of any income (or loss) which has been concealed would not be taken into account and for the purpose of the Explanation to the above section, the disallowances or trading additions relating to this year only would have to be taken into account. It has not been shown before us that the assessee included the amount of l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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