Commissioner of Income Tax vs Bachu and Co.

C.N. Ramachandran Nair, J.—These appeals are filed by the revenue u/s 260A of the Income Tax Act against the orders of the Tribunal confirming cancellation of penalty levied on the assessee u/s 271(1)(c) of the Income Tax Act for the assessment years 1988-89 and 1990-91.

We heard learned senior counsel appearing for the revenue and learned Counsel appearing for the respondent assessee.

The assessee filed return declaring income of Rs. 1,32,227 and Rs. 3,80,000 for the assessment years 1988-89 and 1990-91 respectively. The business premises of the assessee, who was engaged mainly in distribution of edible oil, was searched on 18-8-1990. During the course of search, the authorised officer seized a sum of Rs. 8,35,000 and issued prohibitory order u/s 132(3) for freezing the bank deposits totalling Rs. 12,25,000. Even though, originally, after search, income for the assessment year 1988-89 was determined at Rs. 19,83,770, the same was set aside by the Commissioner (Appeals) and the assessment was remitted back for reassessment. The assessing officer appointed an auditor and got the assessee''s accounts audited by him, u/s 142(2A) of the Act. In the audit report submitted by the said auditor, he had brought out some points of discrepancies, suppressions and defects in the accounts. The assessing officer, on the basis of the audit report, refixed the income at Rs. 28,56,700. However, in the appeal filed by the assessee, the Commissioner (Appeals) reduced the estimation of income at Rs. 6,00,000 as against Rs. 1,32,227 returned by the assessee.

For the assessment year 1990-91, the return itself was filed after the date of search and assessee has returned an income of Rs. 3,80,000. According to the report of the auditor appointed by the assessing officer u/s 142(2A) of the Income Tax Act, the taxable income of the assessee should be Rs. 9,00,833.36. However, the assessing officer, based on the materials available, such as investments, difference in credit balance in the account etc. estimated the income at Rs. 1,36,69,740. The appeal filed against the assessment was substantially allowed by the Commissioner (Appeals) by refixing the income at Rs. 10,00,000.

The assessee as well as the department accepted the assessment modified by the Commissioner (Appeals) in first appeal, whereunder he refixed the income at Rs. 6,00,000 and Rs. 10,00,000, respectively for the assessment years 1988-89 and 1990-91 as against the income returned at Rs. 1,32,227 and Rs. 3,80,000. It is seen that the income refixed by the Commissioner (Appeals) for the assessment year 1988-89 is over four times the income returned by the assessee and for the assessment year 1990-91 it is about three times the income returned by the assessee. It is pertinent to note that the return for the year 1990-91 was filed after the search wherein irregularities were noticed and the assessing officer took action for seizure of cash and freezing the bank account. Assessee raised objection against notice issued u/s 271(1)(c) proposing to levy penalty for the concealment of income. However, the assessing officer overruled the objection and imposed penalty of Rs. 1,40,000 and Rs. 2,00,000 for the assessment years 1988-89 and 1990-91, respectively. The penalty levied is not in excess of the minimum penalty that could be levied u/s 271(1)(c) of the Income Tax Act. The appeals filed by the assessee against imposition of penalty were allowed by the Commissioner (Appeals) holding that no concealment was established when assessments were modified by the Commissioner (Appeals) by estimating income. The appeals filed by the revenue before the Tribunal against the above Commissioner (Appeals)''s order were unsuccessful and hence these Income Tax appeals are filed by the revenue before this Court u/s 260A of the Income Tax Act.

Even though several questions are raised in the appeals, we find the substantial question arising from the order of the Tribunal is whether the Tribunal was justified in confirming the order of the Commissioner (Appeals) in cancelling the penalty. Penalty is imposed on the basis that there was difference between income assessed and the income returned which is concealed income by virtue of operation of Explanation 1(B) to Section 271(1)(c) of the Act if the assessee fails to offer any explanation.

Learned senior counsel for the revenue relied on the decisions of the Supreme Court in M/s. K.P. Madhusudhanan Vs. Commissioner of Income Tax, Cochin, , and that of this Court in Deputy Commissioner of Income Tax Vs. K. Suresh Kumar, , and contended that by virtue of Explanation 1(B) to Section 271(1)(c), the difference between the assessed income and the income returned would be treated as concealed income, if the assessee fails to offer any explanation or if the explanation offered is either false or lacks any bona fides. On the other hand, learned Counsel for the assessee referred to the orders of the Commissioner (Appeals) against the assessments and based on the findings therein, contended that the specific additions have been cancelled by the Commissioner (Appeals) and what he sustained is only the estimated income for both the assessment years. We are unable to uphold the order of the Tribunal sustaining the order of the Commissioner (Appeals) for the main reason that the Commissioner (Appeals) cancelled the penalty by holding that the concealment is not proved by the assessing officer under the main section. The Commissioner (Appeals) took the view that the assessing officer has not resorted to Explanation 1(B) to Section 271(1)(c) for levying penalty. However, on going through the penalty order, we notice that the assessing officer has levied penalty with reference to difference between the income assessed and the income returned by the assessee, even though Explanation 1(B) to Section 271(1)(c) is not specifically referred to by him. As per the decision above referred, the Supreme Court has clearly stated that the Explanation is part of the section and when notice is issued proposing penalty, it is for the assessee to defend the case with reference to the provisions of the section under which penalty is proposed, which includes Explanation 1(B) to Section 271(1)(c). Admittedly, assessee''s accounts were unreliable and the same rather stands accepted by the assessee itself. During search, the assessing officer has established bogus credit entries and suppression of accounts and the same were reconfirmed in the audit report obtained by the assessing officer by appointing an auditor u/s 142(2A) of the Act. Similarly, the assessing officer established a case of unexplained investment in the names of the partners, relatives and unexplained expenditure by them. Even though the assessments were modified in appeal by cancelling the specific additions but by estimating income, the net result is concealment of income in terms of Explanation. 1(B) to Section 271(1)(c) of the Act, because the income estimated by the Commissioner (Appeals), which has become final for the year 1988-89, is over four times of the returned income and for the year 1990-91 it is around three times of the returned income. Therefore, by virtue of operation of Explanation 1(B) to Section 271(1)(c), the assessee is deemed to have concealed the particulars of the difference in the income assessed and the income returned and it is for the assessee to offer reasonable explanation. It is seen from the records and orders that the earlier explanation of the assessee was that the specific additions have been cancelled by the appellate authority and the additional income assessed is based on estimation made by the Commissioner (Appeals). We do not find this as an acceptable explanation for the difference in income assessed and the income returned and therefore, the net result is that the assessee has not offered any reasonable or bona fide explanation as required under Explanation 1(B) to Section 271(1)(c) of the Act to avoid penalty. Consequently, levy of penalty imposed for concealment of income for the year 1988-89 is perfectly justified. For the year 1990-91, assessee filed return after the date of search and detection of irregularities and therefore penalty was rightly levied. We, therefore, set aside the orders of the Tribunal and also of the Commissioner (Appeals) and uphold the penalty levied on assessee u/s 271(1)(c). So far as the quantum of penalty is concerned, there is no scope for this Court to interfere with the same, or remand the matter for reconsideration by appellate authority because penalty levied is not much in excess of the minimum penalty that could be levied under the section. We, therefore, allow the appeals filed by the revenue by vacating the orders of the Tribunal and that of Commissioner (Appeals) and restoring the original penalty orders issued by the assessing officer.