Assistant Commissioner of Income Tax vs Madan Lal Gaggar

Heard.

Learned Counsel for the appellant. The following substantial question is framed at the time of admission:

Whether, on the facts and circumstances of the case, the Tribunal committed error of law by not drawing presumption u/s 271(1)(c) Explanation 5 of the Income Tax Act, that the assessee firm concealed the income by not mentioning in the return of the relevant year.

The facts of proceedings as appear from the order passed by the Tribunal and on the basis of material made available to us by learned Counsel for the parties are that the assessee, Sh. Madanlal has two status under the Income Tax Act, 1961. He is being assessed to Income Tax as individual in the name of Sh. Madanlal and total estimated tax liability for assessment years 1987-88 and 1988-89 was computed for the purpose of retaining assets found during the search. The order shows that Rs. 4 lakhs were included in the income of the assessment year 1987-88 and Rs. 3 lakhs for the assessment year 1988-89. The firm of which Madanlal is a partner is assessed as a registered firm in the name of M/s. Madanlal Gaggar. The present appeal relates to proceedings for levy of penalty on the firm M/s. Madanlal Gaggar. A search was conducted at the premises of Sh. Madanlal, between October 14, 1987 and October 17, 1987. This search was carried out under a warrant issued u/s 132(1) in the name of Sh. Madan Lal. Simultaneous search was conducted on the business premises of the assessee. Order in terms of Section 132(5) of the Income Tax Act, 1961, were also made in the name of Sh. Madanlal only in his status as individual. In the order u/s 132(5) it was noticed that no separate addition is being made in the case of the firm since the assessee has voluntarily offered in his statement recorded u/s 132(5) the amount of Rs. 7 lakhs as income from undisclosed sources to be spread over in two different years i.e., the assessment years 1987-88 and 1988-89.

The assessee-firm has filed a return initially for the assessment year 1987-88 on August 13, 1987, and declared total income of Rs. 47,671 and the assessment was also completed u/s 143(1) on the returned income on March 31,1987. However, later on this return for 1987-88 filed on February 9, 1990, in pursuance of notice u/s 148 issued on February 6, 1990. The assessee showed income of Rs. 4,46,761 instead of Rs. 46,761 as per the original return and claimed loss of Rs. 1 lakh in mining business. However, the Assessing Officer disallowed the claim of loss and assessed the firm at Rs. 4,47,761. In his individual capacity including remainder Rs. 3 lakhs as his income. The amount of Rs. 3 lakhs surrendered by the assessee Sh. Madanlal out of Rs. 7 lakhs as noticed order u/s 132(5) was assessed in the status as individual and this has become final.

The assessee-firm appealed against the order of assessment including Rs. 4 lakhs in the assessment of the income of the firm contending that he had surrendered the amount of Rs. 4 lakhs in his individual capacity. By mistake the amount had been again included in the income of the firm, while filing the revised return. He, therefore, claimed exclusion of Rs. 4 lakhs, therefrom.

The Commissioner of Income Tax (Appeals) vide his order dated March 2, 1995, allowed the appeal. The Commissioner of Income Tax has made the following observations:

I have considered the facts of the case. In support the learned Authorised Representative has filed photocopy of order u/s 132(5) order which clearly states that the search was authorised in the case of Shri Madanlal Gaggar (Indl) and the order u/s 132(5) was passed in his individual capacity. This includes the sum of Rs. 4 lakhs working of which has been given that tax liability for the assessment year 1987-88 of Rs. 3,67,855 which was duly deposited by the individual as stated supra. Apparently, there appears to be some confusion and the amount has been included in the hands of the firm. The individual files are not before me. Apparently the authorisation as well as the order u/s 132(5) was passed in the individual capacity therefore, in the fitness of things the Assessing Officer is directed to verify the individual assessment. Records of Shri Madanlal Gaggar for the assessment year 1987-88 to verify whether the amount of surrender of Rs. 4 lakhs as per order u/s 132(5) also was included in his individual return and the tax paid. If so, the amount shall be excluded from the hands of the firm. Subject to verification the appeal is allowed.

The Commissioner of Income Tax (Appeals) has also referred to the liability of tax u/s 132(5) passed in the individual capacity. This includes the sum of Rs. 4 lakhs working of which has been given while computing tax liability for the assessment year 1987-88 at Rs. 3,67,855 which was duly deposited by the individual as stated. This amount was stated to have been paid by the assessee as per the finding recorded by the Commissioner of Income Tax (Appeals).

For the assessment year 1987-88 the assessee as individual had furnished a return of his income on August 10, 1987, before search was conducted. The assessment took place on March 30,1990. Significantly the assessment order by the Assistant Commissioner of Income Tax, Investigation Circle, recorded his finding as under:

During the course of proceedings u/s 132(5) in the case of a firm the assessee vide his letter dated February 4, 1988, declared net income assessable in the assessment year 1987-88 at Rs. 4,00,000 and accordingly he filed a revised return on February 5, 1990, declaring net income at Rs. 4,15,903.

In other words in the case of the individual for the assessment year 1987-88 the Assessing Officer took the view and connected declaration of Rs. 4 lakhs during search as income of the firm and assessed the assessee. He was not found guilty of any concealment.

However, penalty proceedings were initiated in the case of the firm u/s 271(1)(c) for concealing particulars of income on the basis of addition made in the revised return and penalty was levied. The assessee''s plea to invoke Explanation 5 to Section 271(1)(c) was rejected inter alia on the ground that no statement u/s 132(4) could be recorded by the assessee Madanlal because he was not present during the search. However, in the next breath the Assessing Officer has referred to the statement recorded u/s 132(4).

Be that as it may, he found that since no amount was surrendered during the course of his examination but the amount was surrendered by a separate letter dated February 4, 1988, addressed to the officer during the course of proceedings u/s 132(5) which we have noticed above, the assessee cannot get the benefit of Section 271(1)(c) Explanation 5, read with Section 132(4) of the Income Tax Act which absolves the amount surrendered during the course of statement u/s 132(4) by giving details thereon from the reach of penalty proceedings. Thus, by denying the benefit of presumption of the proceedings under Explanation 5, the Assessing Officer imposed the minimum imposable penalty u/s 271(1)(c) vide order dated September 28, 1995.

The Commissioner of Income Tax (Appeals) while passing the order dated January 15, 1996, confirmed the levy of penalty.

However, in the second appeal, the Tribunal found by considering the aforesaid material that search was conducted in the presence of Sh. Madanlal in individual capacity. That order u/s 132(5) was made against the individual. Madanlal in his individual capacity has stated that the amount of Rs. 4 lakhs is being surrendered by him in his individual capacity and not by the applicant-firm. The estimated tax liability was also computed for the assessment year 1987-88 in respect of Mandanlal individual by including Rs. 4 lakhs as the amount surrendered by him and the demand created by the order was duly paid by the assessee in his individual capacity. But by mistake the applicant-firm has declared the income surrendered by the individual as the income of the firm. On account of this mistake the firm cannot be attributed with guilt of concealing the particulars of the firm''s income which was surrendered by the assessee in individual capacity. It also noticed that the tax on the surrendered income made by Madanlal in individual capacity has also been paid by him. In view thereof, the Tribunal found that penalty could not be levied u/s 271(1)(c). For the same reason, penalty levied u/s 273(1)(a) for non-payment of advance tax by the Assessing Officer was cancelled.

At this juncture, we found that reference to the presumption in question appears to be inapt. As the levy of penalty by the Assessing Officer and subsequent setting aside of the penalty by the Tribunal is not founded on the basis of presumption that the assessee is not guilty of concealment or furnishing the particulars of income by considering the material that was available on record and accepted the explanation furnished by the assessee in respect of addition made in the return of income for the assessment year 1987-88, therefore, nothing turns on the question of presumption only.

It is well-settled and hardly needs any elaboration that the presumption raised u/s 271(1)(c), Explanation 5 read with Section 132(4) of the Income Tax Act is a rebuttable presumption which can be rebutted by adducing additional evidence as well as by the material available on record also. No specific mode has been prescribed for rebutting the presumption of concealing particulars of income or concealment of income which arises in respect of addition made or claim to deduction disallowed by the assessing authority as per Explanation 1 appended to Section 271(1).

Therefore, when the Tribunal has considered the material and reached a definite finding that the assessee is not guilty of concealing the particulars of his income or furnishing inaccurate particulars of such income, the question of burden of proof and raising of the presumption takes a backseat.

The Explanation 1 to Section 271(1) reads as under:

Where in respect of any facts material to the computation of the total income of any person under this Act,--

(A) such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) (or the Commissioner) to be false, or,

(B) Such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him,

then, the amount added or disallowed in computing the total income of such person, as a result thereof shall, for the purposes of Clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed.

Apparently, it is a case in which the Assessing Officer has not found as such that the explanation offered by the assessee is false. On the other hand, it was found by the Commissioner of Income Tax (Appeals) in the first instance that the order u/s 132(5) reveals that surrender of income has been made by the assessee in his individual capacity because the order u/s 132(5) was made in the capacity while treating the assessee as individual only and the proceedings were taken in respect of the individual only. It was also accepted that as per the amount taken, liability determined u/s 132(5) has already been paid by the assessee, therefore, it was apparently established by the order of the Commissioner of Income Tax (Appeals) read with the order passed u/s 132(5) of the Act of 1961 that the assessee in the individual capacity has surrendered Rs. 7 lakhs as income from undisclosed sources spreading it out in two assessment years 1987-88 and 1988-89. The assessee''s estimated liability for tax on such income was worked out in the order u/s 132(5) only on that premise. The tax liability of the assessee as individual was also determined which has been paid by him. From these facts, it was apparent that the assessee as individual had surrendered Rs. 7 lakhs before the Assessing Officer in proceedings u/s 132 and he has also paid tax thereon.

Very significantly while assessing the assessee as individual the Assessing Officer noticed and accepted that surrender of Rs. 4 lakhs during search was in the case of a firm. This finding is apparently incongruous and contrary to the record of the proceedings u/s 132(5) which was placed before us during the hearing and also contrary to the findings recorded by the Commissioner of Income Tax (Appeals) in the appeal of the firm against the assessment order u/s 143(3). If the surrender of income is assumed to be in the case of the firm by the Assessing Officer and the firm had surrendered the income in its capacity as firm, there would have hardly been any case for initiating penalty proceedings u/s 271(1)(c). It was by disjuncting the case of the firm from his own findings in the case of the assessee as individual that he had discarded its Explanation.

The same mistake was apparently committed by the Commissioner of Income Tax (Appeals) while affirming the penalty order in the case of the firm. While rejecting the plea of the assessee to invoke Explanation 5 to Section 271(1)(c) the Commissioner of Income Tax (Appeals) relied on the statement u/s 132(4) as in respect of the individual and not in the case of the firm. But in coming to this conclusion that the assessee had in all surrendered Rs. 7 lakhs during the search proceedings Rs. 4 lakhs for the assessment year 1987-88 and Rs. 3 lakhs for the assessment year 1988-89. He paid the tax determined in respect of these two items as per order passed u/s 132(5) as individual. In his return also he had surrendered Rs. 7 lakhs only albeit Rs. 4 lakhs were included in the return of the firm and not in the case of individual. On the basis of the order u/s 132(5) no additions were made in the returned income of the individual which would have been the natural corollary of attributing the surrender of Rs. 7 lakhs by the assessee as individual and suffer order u/s 132(5) on that basis as individual in respect thereof.

There was never any amount other than that surrendered during the search by the assessee as an individual.

It is also noticeable that the assessee, in fact, challenged the order passed on the basis of the return submitted by the firm before the Commissioner of Income Tax (Appeals) bringing out this mistake and sought exclusion of income of the assessee of the firm, which was found plausible by the Commissioner of Income Tax (Appeals). In all these circumstances, if the Tribunal has accepted the explanation furnished by the assessee to be correct, no error can be found with it nor such finding can be held to be perverse.

In view of these findings that the assessee has succeeded to substantiate the explanation furnished by him, at any rate the explanation submitted by the assessee cannot be said to be not bona fide. In that view of the matter the Tribunal was justified in not sustaining the penalty merely by raising presumption under Explanation 1 and Explanation 5.

We are of the opinion that in the aforesaid facts and circumstances, the findings that the assessee''s explanation about the surrendered income during the proceedings u/s 132(5) having wrongly been included in the return submitted by the firm of which the assessee individual was a partner was substantiated are findings of fact based on relevant material, the same cannot be said to be perverse. Hence levy of penalty has rightly been not sustained.

In view of the aforesaid, the order passed by the Tribunal does not call for interference.

Accordingly, the appeal fails and is hereby dismissed. There shall be no order as to costs.