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PETITIONER: COMMISSIONER OF INCOME TAX, MADRAS

       Vs.

RESPONDENT: M/S.  KHODAY ESWARSA & SONS

DATE OF JUDGMENT22/09/1971

BENCH: VAIDYIALINGAM, C.A. BENCH: VAIDYIALINGAM, C.A. REDDY, P. JAGANMOHAN

CITATION:  1972 AIR  132            1972 SCR  (1) 846  1971 SCC  (3) 555  CITATOR INFO :  RF         1973 SC  22  (14)  RF         1980 SC1146  (6)  F          1992 SC 591  (2)

ACT: Income-tax Act (11 of 1922), s. 28 (1) (c) Levy of penalty- Reason, in assessment proceedings-Weight to be attached to.

HEADNOTE: In income-tax proceedings to the taxable income shown by the respondent  in its return two items among others were  added on  the basis that there were illicit sales of  alcohol  and that  certain  sales bad not been properly  accounted  ’for. Thereafter,  the Income-tax Officer,  Special  Investigation Circle,  issued  notice that he proposed to levy  a  penalty under  s.  28(1)  (r) of the Income-tax Act,  1922,  as  the respondent  had  concealed  particulars of  its  income  and deliberately furnished inaccurate particulars.  He  rejected the  explanation of the assessee and levied a  penalty.   In the order levying penalty the Income-tax Officer stated that the  reasons  for adding the disputed amounts in  the  total income  of  the assessee had been already discussed  in  the original  order of assessment and that there was no need  to repeat them.  The Appellate Assistant Commissioner in appeal confirmed  the  penalty.  His approach to the case  was  not different and was based upon a guess that because there were many  contiguous  dry  areas  the respondent  would   have surreptitiously   sold  alcohol.   The  Appellate   Tribunal considered the circumstances under which the additions  came to be made by the Department in the assessment  proceedings, and the various points which were pressed before it and  the Appellate Assistant Commissioner on behalf of the  assessee, and  held  that  though  there  might  be  certain  doubtful transactions  it could not be stated that assessee had  made any   deliberate  attempt  at  concealment   regarding   its pharmaceutical  section,  and that, though  there  might  be justification   for   making  additions  in   the   original assessment  order  those additions by themselves  could  not lead to the conclusion that the respondent had concealed its income  or  that it had  furnished  deliberately  inaccurate particulars.  On the basis of those findings  the  Appellate Tribunal  set aside the order levying penalty.   Thereafter,

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the Appellate Tribunal, holding that the reasons given by it for setting aside the penalty proceedings were all based  on findings  of fact and that no question of law arose  out  of those findings, rejected an application by the appellant for referring the question as to whether the Appellate  Tribunal was  right  in cancelling the penalty.  The  appellant  then filed an application under s. 66(2) of the Act but the  High Court dismissed it on the same ground. Dismissing the appeal, HELD : The penalty proceedings being penal in character  the Department must establish that the receipt of the amount  in dispute constitutes income of the assessee.  Apart from  the falsity  of  any  explanation  given  by  the  assessee  the Department  must have before it, be-fore levying a  penalty, cogent material or evidence from which it could he  inferred that the assessee had consciously concealed the  particulars of  his  income  or had  deliberately  furnished  inaccurate particulars.    The  original  assessment   proceeding   for computing the tax is evidence in the penalty proceeding, but the  penalty  cannot be levied solely on the  basis-’of  the reasons given in the original assessment order. [853 B-D]                             847 In  the  present  case,  except the  reasons  given  in  the original  assessment order for including the disputed  items in the total income, the Department had no other material or evidence from which it could be reasonably inferred that the assessee had consciously concealed particulars of his income or  had deliberately furnished inaccurate particulars.   The Appellate  Tribunal made a correct and judicial approach  in considering the question whether the penalty provisions were attracted as against the respondent.  The conclusions  drawn by  the  Appellate Tribunal were findings of  fact  recorded against the Department.  Since on those findings of fact  no question  of  law  arose the High  Court  was  justified  in rejecting  the application filed by the appellant  under  s. 66(2) of the Act. [852 B-E 853 E-F] Commissioner  of  Income-tax  West Bengal-1  v.  Anwar  Ali, [1970] 76 I.T.R. 696, followed.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 648 of 1967. Appeal  by special leave from the judgment and  order  dated October  3, 1966 of the Mysore High Court in Civil  Petition No. 10 of 1966. R. H. Dhebar and J. Ramamurthi, for the appellant. The respondent did not appear. The Judgment of the Court was delivered by Vaidialingam,  J.  This  appeal, by special  leave,  by  the Commissioner of Income-,tax, Madras, is against the judgment and order dated October 3, 1966 of the High Court of Mysore, rejecting  the appellant’s application filed under s.  66(2) of  the Income-tax Act, 1922 (hereinafter to be referred  as the  Act) for directing the Income--tax Appellate  Tribunal, Madras Bench to refer the question of law to the High Court. The  question  of  law, which the  appellant  wanted  to  be referred was :               "Whether on the facts and in the circumstances               of the case the Appellate Tribunal was  right.               in  cancelling  the  penalty of  Rs.  3  5,000               levied  under  section 2 8 ( 1 )  (c)  of  the               Indian Income-tax Act, 1922." The  respondent was a firm carrying on business of  manufac- turing  silk,  carbon papers, type-writer  ribbons,  liquor,

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spiriturous  drugs  and chemicals etc.  In  respect  of  the assessment  year 1955-56, the respondent had sent  a  return showing  Rs. 51,214 as taxable income.  On looking into  the accounts  and  other records, the Income-,Lax  Officer  made several  additions  to the amount shown in  the  return  and ultimately  fixed the total assessable income in the sum  of Rs.  3,30,474.   On appeal, the amount was reduced  and  the taxable income was fixed in the sum of Rs. 2,09,575.  In the further  appeal by the assessee to the  Appellate  Tribunal, there 848 was no alteration in this figure.  Only two items which were added to tilt income and which have been accepted by all the authorities required to be noticed.  They are : Pharmaceuticals, section-Rs. 77,518.00 Chemicals section-Rs. 9,900.00. Relating  to the pharmaceuticals section, it is the view  of the Income-tax Officer that some of the sale bills  produced by  the respondent were found to be forged ones and some  of the  purchasers  of tincture were also  fictitious  persons. There was no evidence produced by the assessee to show  that the   Kolae  powder,  which  was  very  essential  for   the manufacture of tincture had been purchased by it.  Hence the Income-tax Officer drew an inference that the respondent had not really manufactured tincture and that on the other  hand the firm must have sold all alcohol illicitly. It  was on this basis that the Income-tax Officer held  that the assessee must be considered to have omitted to show  the sum  of Rs. 77,588.  Similarly, regarding chemical  section, the  Income-tax  Officer found that the respondent  has  not accounted  for a part of sale of Ethyl Acetate and  that  on verification  it  Was  found that there  has  been  a  large deficit  of rectified spirit.  On this basis the  Income-tax Officer drew an inference that the firm has again secreted a large quantity of rectified spirit under the cloak of  manu- facture of chemicals.  On the ground that certain sales  had not  been properly accounted for, the sum of Rs.  9,900  was added to the taxable income of the assessee.  It was on  the above basis that the two items were included in ,,,he  total assessable income of the assessee firm. These reasons given by the Income-tax Officer have been,  by and large, accepted by the Appellate Assistant  Commissioner and  the  Income-tax  Appellate  Tribunal.   The  Income-tax Officer, Special Investigation Circle A, Bangalore issued  a notice  under  s.  28(1)  to  the  respondent  that  it  has concealed  the  particulars of its income  and  deliberately furnished  inaccurate  particulars in respect of  the  above amounts  added to the total income and that  the  Income-tax Officer  proposed to levy a penalty under S. 28 (1)  (c)  of the Act.  No doubt, in the notice certain other items, which had  already  been  added  to the  total  income  were  also referred  to.   But those items have been deleted  from  the penalty proceedings by the Appellate Assistant Commissioner. Therefore,  we  are  only  concerned  with  the  two  items, referred to earlier. The assessee sent a reply stating that it has not  concealed the  particulars  of  ’its income nor  has  it  deliberately furnished  inaccurate  particulars  of  such  income.    The explanation  offered by theassessee was not accepted by  the Income-tax Officer, and the latter                             849 by  his order dated February 15, 1963 imposed a  penalty  of Rs.  35,000 on the ground that the respondent had  concealed the  particulars of its income.  That amount of penalty  was levied by the Income-tax Officer on the ground that over and

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above  the  two items relating to  the  Pharmaceuticals  and Chemical  sections,  there has been a concealment  of  three more items totalling Rs. 32,267. They were Silk business; shortage in twisted silk yarn-Rs. 14,545.00 Shortage in Artificial silk Rs. 3,434.00 Carbons;  Unaccounted consumption Rs. 14,288.00 It was on this basis that the total penalty was levied. On  appeal  to  the Appellate  Assistant  Commissioner,  the latter,  no  doubt deleted these three items  totalling  Rs. 32,267 from the penalty proceedings, but confirmed the order of  the  Income-tax Officer regarding the  two  other  items holding  that  the omission by the assessee to  include  the said  two items amounted to the firm concealing  particulars regarding  its  income under s. 28(1) (c) of the  Act.   The penalty  amount  levied by the Income-tax Officer  was  also confirmed.   Though  the  Appellate  Assistant  Commissioner reduced the quantum of concealment-even assuming that  there has been a concealment-he did not make any reduction in  the penalty actually levied by the Income-tax Officer. The assessee carried the matter in appeal before the Income- tax  Appellate Tribunal, Madras Bench.  The  main  grievance made by the assessee was that there has been no  independent consideration  by  the Income-tax Officer of  the  Appellate Assistant Commissioner whether even on the basis that  there has  been an omission by it to include certain items in  its return, such omission came within s. 28 (1) (c) of the  Act, so  as to attract the levy of penalty.  The  assessee  also contended that both the Income-tax Officer and the Appellate Assistant  Commissioner  have mainly relied on  the  reasons given in the order of assessment for adding these two  items in  the total income.  According to the assessee  there  has been  no proper exercise of jurisdiction under s. 28 of  the Act. The Income-tax Appellate Tribunal by its order dated  Novem- ber  13, 1964 set aside the order of the Income-tax  Officer as confirmed by the Appellate Assistant Commissioner levying penalty on the respondent. The Commissioner of Income-tax filed an application under s. 66(1)  of the Act, requiring the Appellate Tribunal to  draw up 850 a statement of the case and refer the question extracted  in the earlier part of the judgment, to be referred to the High Court.   The Appellate Tribunal by its order dated  June  7, 1965  rejected the Said application on the ground  that  the reasons   given  by  it  for  setting  aside   the   penalty proceedings  were all based on findings of fact and that  no question of law arose out of those findings. The appellant filed an application before the High Court  of Mysore,  under s. 66(2) for directions being issued  to  the Appellate Tribunal to, state the case and refer the question of law,’ which the Appellate Tribunal has refused to  refer. A  Division  Bench  of the High Court  by  its  order  dated October  3,  1966 dismissed the appellant’s  application  on ,,he ground that the finding of the Appellate Tribunal  that the  Income-tax  Department  had failed to  prove  that  the assessee   had   concealed  its  income  or  that   it   had deliberately furnished inaccurate particulars of its  income are  all on facts and that not question of law  arises  from the order of the Appellate Tribunal. Mr.  Dhebar, learned counsel for the appellant,  urged  that the order of the High Court is erroneous.  According to  him the  view of the High Court that the conclusions arrived  at by  the  Appellate  Tribunal are all on facts  and  that  no question  of  law arises, is erroneous.  The  counsel  urged

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that there has been an omission by the respondent to include in  particular  two items which are the subject  of  penalty proceedings  and the order of assessment in that regard  has become  final.  Hence it follows that this is a  case  where the assessee has concealed the particulars of its income  or has  deliberately  furnished inaccurate particulars  of  its income.   Both  the  Income-tax  Officer  as  well  as   the Appellate  Tribunal  have in the  penalty  proceedings  gone elaborately  into this aspect before levying  penalty.   The approach  made by the Appellate Tribunal when it  set  aside the  orders  levying  penalty  is  not  justified  in   law. Therefore, he urged that the High Court should have directed the  Appellate  Tribunal  to  state a  case  and  refer  the question of law as prayed for by the Appellant. The  respondent  has not entered appearance before  us.   We have been taken through the entire proceedings leading up to the  order levying penalty.  We have also gone  through  the reasons given by the Income-tax Officer for levying  penalty as well as the order of the Appellate Assistant Commissioner confirming the same.  We cannot accept the contention of Mr. Dhebar  that the Appellate Tribual has summarily  interfered with  the orders levying penalty.  We have gone through  the order  of  the Appellate Tribunal and we find  that  it  has considered the circumstances under which the additions  came to  be made by the Department in the assessment  proceedings as well as the points that were pressed before it, on behalf of the assessee as well as the Appelate Assistant                             851 Commissioner.  It is the view of the Appellate Tribunal that theDepartment has not established that the assessee has  not manufactured  tincture  and that it had sold  only  alcohol. This conclusion arrived at by the Income-tax Officer in  the penalty   proceedings is,  according-to   the   Appellate Tribunal,   purely  one  of  conjecture  or  surmise.    The Appellate  Tribunal,  no doubt, was prepared to  accept  the contention  of  the  Department that there  were  a  lot  of doubtful circumstances.  Notwithstanding these circumstances the  Appellate Tribunal is of the view that when  admittedly there  are  Excise  authorities  in  the  premises  of   the respondent, it is very difficult to hold that those officers would  have permitted tile assessee to utilise  the  alcohol for  other purposes.  The Appellate Tribunal has  also  held that even the sale bills produced by the respondent, contain the  proper per it numbers given by the  Excise  authorities and  that  the  Income-tax  Department  have  not  made  any inquiries from the Excise authorities whether those relevant sales  hive  been  made without  their  authorisation.   The Appellate  rribunal has further held that there is no  stock discrepancy  in  Kola  Liquidum if  the  transactions  art-- considered  as  a whole for the entire  period.   Therefore, regarding  Pharmaceuticals  section the  Appellate  Tribunal finally  held  that  though there may  be  certain  doubtful transactions,  it  cannot be stated that the,  assessee  has made  any deliberate attempt at concealment.  Regarding  the Chemical section, the Appellate Tribunal is of the view that though  there may be justification for making  additions  in the  original  assessment order to the amount shown  in  the return,  those  additions by themselves cannot lead  to  the conclusion  that the respondent has concealed its income  or that it has furnished deliberately inaccurate particulars. It  was  on the basis of these findings that  the  Appellate Tribunal has set aside the order levying penalty. One  thing that strikes us when going through the order  of the Income-tax Officer levying penalty and the order of  the Appellate  Assistant Commissioner confirming the said  levy,

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is  that  there  is not much of  an  independent  discussion regarding  the material question that has to be  considered, namely,  whether the firm has concealed the  particulars  of its   income  or  whether  it  has  deliberately   furnished inaccurate  particulars of such income.  On the other  hand, the  Income-tax Officer after referring to  the  explanation furnished by the assessee to the show cause notice,  clearly says  that the facts relating to the unaccounted items  have been  fully  discussed already in  the  relevant  assessment orders  for  the  concerned assessment  year  and  that  the reasons  given  therein need not be  repeated  again.   Then there is only a very summary disposal of the plea raised  by the respondent that he has not concealed the particulars  of his  income,  nor has it deliberately  furnished  inaccurate particulars, 852 of its income.  The approach made by the Appellate Assistant Commissioner  is not far different from that of the  Income- tax  Officer.  In fact the Appellate Assistant  Commissioner makes  a further guess that in view of the fact  that  there were  very many dry areas bordering Mysore,  the  respondent would have surreptitiously sold alcohol that was supplied to it without using it for the purpose of making tincture.   It is  the view of the Appellate Assistant  Commissioner  that the  mere fact that there are Excise authorities to  control the  activities,  of persons like the assessee,  is  of  no material consequence.  From what we have stated above, it is clear  that while there has been no proper approach made  by either  the Income-tax Officer when he levied penalty or  by the  Appellate Assistant Commissioner when he confirmed  the order levying penalty, the Appellate Tribunal, on the  other hand,  has  made  a very correct and  judicial  approach  in considering the question whether the penalty provisions  are attracted as against the respondent.  After a very fair  and full  consideration  of  the  material  circumstances,   the Appellate Tribunal has set aside the order levying  penalty. As  rightly pointed out by the High Court,  the  conclusions drawn by the Appellate Tribunal are all on findings of  fact recorded  against  ,"-he Department.  On those  findings  of fact,  there  was no question of law arising  for  reference being  made to the High Court.  Under  those  circumstances, the  High  Court was perfectly justified  in  rejecting  the application  filed  by the appellant under s. 66(2)  of  the Act. Before  we  conclude we may refer to the  decision  of  this Court  in  Commissioner  of Income-tax West  Bengal  I,  and Another  v. Anwar Ali(1), wherein it has been held that  one of  the principal objects in enacting s. 28 is to provide  a deterrent  against recurrence of default on the part of  the assessee  and  that  s. 28 is penal in the  sense  that  its consequences  are intended to be effective deter-rent  which would put a stop to the practices which the legislature con- siders  to  be  against the public interest.   It  has  been further  held  that the Department must establish  that  the receipt  of the amount in dispute constitutes the income  of the  assessee and if there is no evidence on  record  except the explanation given by the assessee, which explanation has been found to be false, it does not follow that the  receipt constitutes  its taxable income.  It has been further  held that  as the proceedings under s. 28 are of a  penal  nature and the burden is on the Department that a particular amount is  revenue receipt, it is legitimate to say that  the  mere fact that the explanation of the assessee is false, does not necessarily  give  rise to the inference that  the  disputed amount  represents the income.  It has been pointed  out  in

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the  said decision that the finding given in the  assessment proceeding  for  determining  or computing the  tax  is  not conclusive [1970]  76 I.T.R. 696. 85 3 though it may be good evidence.  It has been further held by this, Court in the above decision :               "Before penalty can be imposed the entirety of               circumstances  must  reasonably point  to  the               conclusion    that   the    disputed    amount               represented  income and that the assessee  had               consciously  concealed the particulars of  his               income    or   had   deliberately    furnished               inaccurate particu- lars." From  the above it is clear that penalty  proceedings  being penal  in character, the Department must establish that  the receipt  of the amount in dispute constitutes income of  the assessee.   Apart from the falsity of the explanation  given by  the assessee, ’he Department must have before it  before levying  penalty cogent material or evidence from  which  it could  be  inferred  that-  the  assessee  has   consciously concealed the particulars of his income or had  deliberately furnished inaccurate particulars in respect of the same  and that ,.the.- disputed amount is a revenue receipt.  No doubt the  original assessment proceedings, for computing the  tax may be a good it,,, of evidence in the penalty  proceedings; but the penalty cannot be levied solely on the basis of  the reasons given’-in the original order of assessment. In  the case before us we have already pointed out that  in the  order  levying  penalty  the  Income-tax  Officer   has categorically  stated  that  the  reasons  for  adding   the disputed  amounts in the total income of the  assessee  have been  already discussed in the original order of  assessment and  that  they need not be repeated again.   The  Appellate Assistant  Commissioner,  we have already pointed  out,  has made only a guess work.  That clearly shows that except  the reasons given in the original assessment order for including the  disputed items in the total income, the Department  had no  other  material  or  evidence from  which  it  could  be reasonably  inferred  that  the  assessee  had   consciously concealed the particulars of his income or had deliberately’ furnished inaccurate particulars. For all the reasons given above, it follows that there is no merit in the appeal and it is accordingly dismissed.  As the respondent  has not appeared, there will be no order  as  to costs. V.P.S.                                                Appeal dismissed. 854