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PETITIONER: ANANTHARAM VEERASINGAIAH & CO.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, A.P.

DATE OF JUDGMENT15/04/1980

BENCH: PATHAK, R.S. BENCH: PATHAK, R.S. UNTWALIA, N.L. VENKATARAMIAH, E.S. (J)

CITATION:  1980 AIR 1146            1980 SCR  (3) 618

ACT:      Income Tax  Act,  1961,  Section  271(1)(c),  scope  of Penalty Proceedings in quasi judicial and Burden of proof is on Revenue-Secret  Profits or  undisclosed income  and their actual availability for application by the assessee-Power of the High Court in a Tax Reference case, explained.

HEADNOTE:      The appellant,  assessee in  an Abkari  contractor.  It filed a  return of  its income for the assessment year 1959- 60, disclosing  a total  turnover of  Rs. 10,92,132/- and an income of Rs. 7,704/-. The Income Tax Officer did not accept the correctness  of  the  return.  He  found  that  on  12th December,  1957   and  16th  January,  1958  the  excess  of expenditure  over  the  disclosed  available  cash  was  Rs. 17,726/-  and  Rs.  65,066  respectively.  He  also  noticed several deposits, totalling Rs. 28,200, entered in the names of  certain  Sendhi  shopkeepers.  The  Income  Tax  Officer rejected  the   account  books   of  the  assessee  and  his explanations for the discrepancies thereof and estimated the assessee’s income  on an  overall figure of Rs. 5,00,018. In appeal  before  the  Appellate  Assistant  Commissioner  and thereafter before  the Income  Tax  Appellate  Tribunal  the assessee succeeded in getting the assessed income reduced to Rs. 1,30,000  in addition  to  the  books  profits.  Penalty proceedings were taken against the assessee and the case was referred  to  the  Inspecting  Assistant  Commissioner,  who imposed a  penalty of  Rs. 75,000  under s. 271(1)(c) of the Income Tax  Act,  1961.  On  appeal  by  the  assessee,  the Appellate Tribunal  held that there was no positive material to establish  that the  cash deposits  represented concealed income. In  regard  to  the  cash  deficits,  the  Appellate Tribunal noticed  that for  the assessment  year 1957-58  an addition of  Rs. 2,00,000 had been made to the book profits, and it  observed that  some part  of that  amount could have been ploughed back into the business. It held that an amount of Rs. 90,000 representing unledgerised cash credits of that year could  be said  to have  been introduced  in that year. Allowing the  appeal, the  Appellate Tribunal  set aside the penalty order made by the Inspecting Assistant Commissioner.      On a  reference to  the High  Court, at the instance of the Commissioner of Income Tax, the High Court held that the

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Appellate Tribunal  was not  justified in  holding  that  no penalty was leviable. Hence the appeal by special leave.      Directing the  Appellate Tribunal to take up the appeal under section 260(1) of the Income Tax Act, the Court ^      HELD: An  order imposing  a penalty  is the  result  of quasi criminal  proceedings. The burden of proof lies on the Revenue to  establish that  the disputed  amount  represents income and  that the  assessee has consciously concealed the particulars of  his income  or  has  deliberately  furnished inaccurate particulars. It is for the Revenue to prove these ingredients before a penalty can be imposed. [622B-C] 619      Since the  burden of  proof  in  a  penalty  proceeding varies from  that involved  in an  assessment proceedings  a finding  in  an  assessment  proceeding  that  a  particular receipt is  income cannot  automatically  be  adopted  as  a finding to  that effect  in the  penalty proceeding.  In the penalty proceeding the taxing authority is bound to consider the matter  afresh on  the material  before it  and, in  the light of  the burden  to prove  resting on  the Revenue,  to ascertain whether  a particular amount is a revenue receipt. No doubt,  the fact  that the  assessment order  contained a finding  that   the  disputed   amount   represents   income constitutes good  evidence in the penalty proceeding but the finding in  the assessment  proceeding cannot be regarded as conclusive for  the  purposes  of  the  penalty  proceeding. Before  a  penalty  can  be  imposed  the  entirety  of  the circumstances must  be taken  into account and must point to the conclusion  that the  disputed amount  represents income and that  the assessee has consciously concealed particulars of  his   income  or   deliberately   furnished   inaccurate particulars. The  mere falsity  of the  explanation given by the assessee is insufficient without there being in addition cogent  material   or  evidence  from  which  the  necessary conclusion attracting a penalty could be drawn. [622C-G]      Commissioner of  Income Tax,  West Bengal  and Anr.  v. Anwar Ali  [1970] 76 I.T.R. 696; Commissioner of Income Tax, Madras v.  Khoday Eswara  and Sons,  [1972] 83  I.T.R.  369; applied.      2. When  an ’intangible’  addition is  made to the book profits during  an assessment proceeding, it is on the basis that the amount represented by that addition constitutes the undisclosed income  of the  assessee. That  income  although commonly described as ’intangible’, is as much a part of his real income  as that  disclosed by his account books. It has the same  concrete existence.  It could  be available to the assessee as the book profits could be. [623A-B]      3. Secret  profits or undisclosed income of an assessee earned in  an earlier assessment year may constitute a fund, even though  concealed, from  which the  assessee  may  draw subsequently for  meeting expenditure or introducing amounts in his  account books.  Any  part  of  that  fund  need  not necessarily  be   regarded  as  the  source  of  unexplained expenditure incurred  or of  cash credits  recorded during a subsequent assessment  year. The mere availability of such a fund cannot,  in all  cases, imply that the assessee has not earned further secret profits during the relevant assessment year  It  is  a  matter  for  consideration  by  the  taxing authority,  in  each  case,  whether  the  unexplained  cash deficits and  the cash  credits can be reasonably attributed to a  pre-existing fund  of concealed  profits or  they  are reasonably explained by reference to concealed income earned in that  very year. In each case the true nature of the cash deficit and  the cash  credit must  be ascertained  from  an

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overall  consideration   of   the   particular   facts   and circumstances of  the case.  Evidence may exist to show that reliance cannot  be placed completely on the availability of a  previously   earned  undisclosed.  income.  A  number  of circumstances  of   vital  significance  may  point  to  the conclusion that  the cash  deficit  or  cash  credit  cannot reasonably  be   related  to   the  amount  covered  by  the intangible addition  but must be regarded as pointing to the receipt of  undisclosed income  earned during the assessment year under  consideration. It is open to the Revenue to rely on all  the circumstances  pointing to that conclusion. What those several circumstances can be is difficult to enumerate and indeed,  from the  nature of  the enquiry,  it is almost impossible to  do so. However, they must be such as can lead to the firm conclusion that 620 the assessee  has concealed the particulars of his income or has deliberately  furnished inaccurate particulars. [623C-H, 624A]      Lagadapti Subha  Ramiah v.  Commissioner of Income Tax, Madras, [1956]  30 I.T.R.  593; S.  Kuppuswami  Mudaliar  v. Commissioner of  Income Tax,  Madras, [1964]  51 I.T.R. 757; approved.      In an income tax reference, a High Court should confine itself to  deciding the  question of  law referred  to it on facts found  by the  Appellate Tribunal. It is the Appellate Tribunal which has been entrusted with the authority to find facts. [624D-E]

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil Appeal No. 2592 of 1972.      Appeal by  Special Leave  from the  Judgment and  Order dated 9-11-1971  of the  Andhra Pradesh  High Court  in Case Referred No. 4 of 1970.      S. T.  Desai, T.  A. Ramachandran, Mrs. J. Ramachandran and M. N. Tandon for the Appellant.      S. C.  Manchanda, Miss A. Subashini and D. B. Ahuja for the Respondent.      The Judgment of the Court was delivered by      PATHAK, J.  This appeal,  by special leave, is directed against  a  judgment  of  the  Andhra  Pradesh  High  Court, concerning the  scope of s. 271(1)(c) of the Income Tax Act, 1961.      The assessee is an Abkari contractor. It filed a return of its  income for the assessment year 1959-60, disclosing a total turnover  of Rs. 10,92,132 and an income of Rs. 7,704. The Income Tax Officer did not accept the correctness of the return. He  found that  on  12th  December,  1957  and  16th January 1958  the excess  of expenditure  over the disclosed available cash as Rs. 17,720 and Rs. 650,66 respectively. He also noticed  several deposits, totaling Rs. 28,200, entered in the  names of  certain Sendhi shop-keepers. The assesee’s explanation that the excess expenditure was met from amounts deposited with  him by  some shop-keepers but not entered in his books was not accepted. The alternative explanation that expenditure incurred  earlier  had  possibly  been  recorded later was  also rejected.  In regard to the cash deposits of Rs. 28,200  the assessee  explained  that  they  represented amounts deposited  with it as security. That explanation was rejected insofar  as  deposits  totalling  Rs.  21,000  were concerned. The Income Tax Officer rejected the account books of the  assessee and  estimated the  assessee’s income on an

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overall  figure  of  Rs.  5,00,018.  In  appeal  before  the Appellate Assistant  Commissioner and  thereafter before the Income Tax 621 Appellate Tribunal,  the assessee  succeeded in  getting the assessed income  reduced to  Rs. 1,30,000 in addition to the book profits.  Penalty proceeding  were  taken  against  the assessee  and  the  case  was  referred  to  the  Inspecting Assistant  Commissioner.   The   assessee   reiterated   the explanation  which   it  had   offered  in   the  assessment proceedings.   Predictably,    the   Inspecting    Assistant Commissioner rejected  the explanation  and  held  that  the items  of   cash  deficit   and  cash  deposits  represented concealed income resulting from the suppressed yield and low selling rates  mentioned in  the books. He observed that the assessee had  concealed the  particulars of  his income  and furnished inaccurate  of it, and therefore imposed a penalty of Rs. 75,000 under s.271(1)(c) of the Income Tax Act, 1961. On appeal  by the assessee, the Appellate Tribunal held that there was  no positive  material to  establish that the cash deposits represented concealed income. In regard to the cash deficits,  the  Appellate  Tribunal  noticed  that  for  the assessment year 1957-58 an addition of Rs. 2,00,000 had been made to  the book  profits and it observed that some part of that amount could have been ploughed back into the business. It  held   that  an   amount  of   Rs.  90,000  representing unledgerised cash credits of that year could be said to have been introduced  in this  year.  Allowing  the  appeal,  the Appellate Tribunal  set aside  the penalty order made by the Inspecting Assistant Commissioner.      At the  instance of the Commissioner of Income Tax, the following question was referred to the High Court:-           "Whether on  the facts and in the circumstances of      the case,  the Tribunal is justified in holding that no      penalty is leviable ?"      The High Court held that the Appellate Tribunal was not justified in holding that no penalty was leviable.      In this  appeal, it is urged by learned counsel for the assessee that  the High  Court erred  in interfering  with a finding of  fact, that  the penalty proceedings being quasi- criminal the burden of proof lay on the Revenue to establish that  a  penalty  was  attracted  and  that  the  intangible addition of  Rs. 2,00,000  represented real  income and  the Appellate Tribunal  was right  in considering that an amount of Rs. 90,000 was available to cover the cash deficits.      Section  271(1)(c)   of  the   Income  Tax   Act,  1961 provides:-           "271(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-           (a)         *         *          *         * 622           (b)         *          *          *        *           (c)   has concealed  the particulars of his income                or    deliberately    furnished    inaccurate                particulars of such income he may direct that                such person shall pay by way of penalty...                ....................." This is  the provision  as it stood at the relevant time. It is now  settled law  that an order imposing a penalty is the result of quasi-criminal proceeding and that the burden lies on  the  Revenue  to  establish  that  the  disputed  amount represents income  and that  the  assessee  has  consciously concealed the  particulars of his income or has deliberately

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furnished inaccurate  particulars.  Commissioner  of  Income Tax, West  Bengal and  Another v.  Anwar Ali.  It is for the Revenue to  prove those  ingredients before a penalty can be imposed. Since  the burden  of proof in a penalty proceeding varies from  that involved  in an  assessment proceeding,  a finding  in  an  assessment  proceeding  that  a  particular receipt is  income cannot  automatically  be  adopted  as  a finding to  that effect  in the  penalty proceeding.  In the penalty proceeding the taxing authority is bound to consider the matter  afresh on  the material  before it  and, in  the light of  the burden  to prove  resting on  the Revenue,  to ascertain whether  a particular amount is a revenue receipt. No doubt,  the fact  that the  assessment order  contains  a finding  that   the  disputed   amount   represents   income constitutes good  evidence in the penalty proceeding but the finding in  the assessment  proceeding cannot be regarded as conclusive for  the purposes of the penalty proceeding, That is how  the law  has been  understood by this Court in Anwar Ali (supra),  and we  believed that  to be the law still. It was also  laid down that before a penalty can be imposed the entirety of the circumstances must be taken into account and must point  to  the  conclusion  that  the  disputed  amount represents income  and that  the  assessee  has  consciously concealed  particulars   of  his   income  or   deliberately furnished inaccurate  particulars. The  mere falsity  of the explanation given  by the  assessee, it  was  observed,  was insufficient without there being in addition cogent material of evidence from which the necessary conclusion attracting a penalty could  be drawn. These principles were reiterated by this Court  in Commissioner  of Income Tax, Madras v. Khoday Eswarsa and sons.      In the  present case, the Appellate Tribunal has relied entirely on  the basic  that an  intangible addition  of Rs. 2,00,000 had  been made  to the book profits of the assessee for the assessment year 1957-58 623 and it  inferred that  an amount of Rs. 90,000 was available for being  put  to  use  in  the  year  with  which  we  are concerned.  Now  it  can  hardly  be  denied  that  when  an "intangible" addition  is made to the book profits during an assessment proceeding,  it is  on the  basis that the amount represented by  that addition  constitutes  the  undisclosed income  of  the  assessee  That  income,  although  commonly described as  "intangible", is  as much  a part  of his real income as  that disclosed  by his  account books. It has the same concrete  existence.  It  could  by  available  to  the assessee as  the book  profits could be. In Lagadapati Subha Ramiah v.  Commissioner of  Income-tax,  Madras  the  Andhra Pradesh High Court adverted to this aspect of secret profits and  their   actual  availability  for  application  by  the assessee. That view was affirmed by the Madras High Court in S. Kuppuswami Mudliar v. Commissioner of Income-Tax, Madras.      There can  be no  escape from  the proposition that the secret profits  or undisclosed  income of an assessee earned in an  earlier assessment  year may  constitute a fund, even though  concealed,   from  which   the  assessee   may  draw sufficient for meeting expenditure or introducing amounts in his account books. But it is quite another thing to say that any part  of that  fund must  necessarily be regarded as the source  of  unexplained  expenditure  incurred  or  of  cash credits regarded  during a  subsequent assessment  year. The mere availability of such a fund cannot, in all cases, imply that the  assessee has  not earned  further  secret  profits during the  relevant assessment  year. Neither law nor human experiences  guarantees   that  an  assessee  who  has  been

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dishonest in  one assessment year is bound to be honest in a subsequent assessment year. It is a matter for consideration by the taxing authority in each case whether the unexplained cash  deficits  and  the  cash  credits  can  be  reasonably attributed to  a pre-existing  fund of  concealed profits or they are  reasonably explained  by  reference  to  concealed income earned  in that  very year.  In each  case  the  true nature of  the cash  deficit and  the cash  credit  must  be ascertained from  an overall consideration of the particular facts and  circumstances of  the case. Evidence may exist to show that  reliance  cannot  be  placed  completely  on  the availability of  a previously  earned undisclosed  income. A number of  circumstances of  vital significance may point to the conclusion  that the  cash deficit or cash credit cannot reasonably  be   related  to   the  amount  covered  by  the intangible addition  but must be regarded as pointing to the receipt of  undisclosed income  earned during the assessment year under  consideration. It is open to the Revenue to rely on all the circumstances pointing to 624 that conclusion.  What those several circumstances can be is difficult to  enumerate and  indeed, from  the nature of the enquiry, it  is almost impossible to do so. In the end, they must be  such as  can lead  to the  firm conclusion that the assessee has  concealed the particulars of his income or has deliberately  furnished   inaccurate  particulars.   It   is needless to  reiterate that  in  a  penalty  proceeding  the burden remains  on the  Revenue of  proving the  existing of material leading to that conclusion.      The Appellate Tribunal erred in law in confining itself to the  fact that  an intangible  addition had been added to the assessee’s book profits two years before and that a part of  that   amount  remained   available  to   the   assessee thereafter, the  High Court  is right in departing from that limited approach  and in insisting on a consideration of all the relevant  facts and  circumstances of the case relied on by the  Revenue  for  purpose  of  determining  whether  the Revenue has succeeded in discharging its burden.      But while  considering the legal principles involved in the application  of s.  271(1)(c) the  High  Court,  in  our opinion, has  erred in  entering into  the facts of the case and determining  in point  of fact  that the assessee earned income during  the relevant  previous year  and that  he was guilty of  concealing such  income or  furnishing inaccurate particulars  of  it.  Having  found  that  the  legal  basis underlying the  order of  the  Appellate  Tribunal  was  not sustainable, the  High Court  should have  limited itself to answering the  question  raised  by  the  reference  in  the negative, leaving  it to  the Appellate  Tribunal to take up the appeal  again and redetermine it in the light of the law laid down  by the  High Court.  It is the Appellate Tribunal which has been entrusted with the authority to find facts. A High Court  is confined  to deciding  the  question  of  law referred to  it on  facts found  by the  Appellate Tribunal. That is the kind of order we now propose to make.      Because the  finding of  the Appellate Tribunal that no penalty leviable  rests on  an  erroneous  legal  basis,  we endorse the  opinion of  the High  Court that  the  question referred must  be answered  in the negative. But as the High Court should  not have  rendered findings of fact, we vacate the finding  of fact  reached by  the  High  Court,  without expressing any  opinion on  their correctness, leaving it to the Appellate  Tribunal in  exercise of  its duty  under  s. 260(1) of  the Income  Tax Act  to take up the appeal and to redetermine it conformably to this judgment and in the light

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of the principle laid down in it.      The appeal  is disposed  of accordingly.  There  is  no order as to costs. S.R.                              Case remitted to Tribunal. 625