Commissioner of Income Tax vs Guruvijaya Kuri Co. Ltd.

C.N. Ramachandran Nair, J.—This is an appeal filed by the Revenue u/s 260A of the Income Tax Act, 1961, challenging the order of the Income Tax Appellate Tribunal confirming the cancellation of penalty levied u/s 271(1)(c) of the Income Tax Act, 1961. The respondent-assessee is a private limited company deriving income from chitty business. During the verification of accounts in the course of assessment for the assessment year 1990-91, the Assessing Officer noticed an outstanding credit balance of Rs. 4,55,863 shown as liability in the balance-sheet for kuries that were terminated during 1977 to 1983. The Assessing Officer was of the opinion that the credit balance represents the auction discounts, which were forgone by defaulting subscribers and, therefore, there was no subsisting liability for payment of these amounts to the said subscribers. Therefore, the Assessing Officer found that these amounts were the income of the year, which was carried over as liability by the assessee in the balance-sheet. Even though specific notice was issued asking the assessee to explain the nature of liability shown in the accounts, the assessee did not offer any explanation but just stated that the amount represents liability. Even though, the amounts was offered for assessment and the assessee remitted the tax, the assessee reserved the right to file appeal against the assessment. The assessment order produced as annexure A got confirmed by two level appellate authorities including the Tribunal. The assessee admittedly accepted the Tribunal''s order confirming the assessment.

Since the assessee did not offer any explanation about the credit shown in the balance-sheet as liability, the Assessing Officer levied penalty u/s 271(1)(c) of the Income Tax Act. In the appeal filed by the assessee against the penalty order, the first appellate authority cancelled the penalty against which a second appeal filed by the Department was unsuccessful. The Tribunal''s order in second appeal is under challenge in this appeal filed u/s 260A of the Income Tax Act. Even though four questions are raised for decision by us as arising from the Tribunal''s order, we find in substance the only question that arise from the Tribunal''s order is whether the Tribunal in the absence of any bona fide explanation offered or established by the assessee was justified in casting burden of proof on the Revenue to prove concealment and to cancel the penalty on the ground that the Assessing Officer has not established the nature of concealed income assessed by him in respect of which penalty is levied.

The undisputed fact in the case is that the assessee who has been engaged in the chitty business, showed a credit balance of Rs. 4,55,863 in the balance-sheet in respect of kuries terminated during 1977 to 1983. During the accounting year relevant to the assessment year 1990-91, the assessee from the same account transferred an amount of Rs. 2,41,328 to the profit and loss account and offered the same to tax. However, the balance for Rs. 4,55,863 was still retained as credit balance in the liabilities side of the balance-sheet. In the course of assessment, the Assessing Officer requested explanation from the assessee but the assessee described that the amount was business liability but offered no details. The Assessing Officer was of the view that having regard to the nature of business, the amount of auction discounts forgone by subscribers on account of their default in payment of instalments is the income of the assessee as already found in the assessment. The additions made in the assessment is sustained in two round of appeals and the assessee has accepted the same. Since the explanation was not bona fide, penalty was levied. However, the appeal was decided by the Tribunal relying upon the decision of the Tribunal in the case of M/s. Tirchur Kuri Syndicate Ltd., where the entries in the accounts represented excess payment actually made by subscribers. As in assessment, in penalty proceedings also, the assessee did not offer any explanation for the credit entries shown in the balance-sheet. Therefore, the Assessing Officer found that there is concealed income by virtue of Explanation 1 to Section 271(1)(c). Since the assessee failed to give any bona fide explanation for the show-cause notice, the Assessing Officer by virtue of Explanation 1 contained in Section 271(1)(c), levied penalty for concealment of income. The first appeal filed by the assessee is allowed following the order of the Tribunal in another kuri case.

Learned standing counsel appearing for the Revenue contended that Explanation 1 to Section 271(1)(c) is clearly applicable in this case because the assessee admittedly did not offer any explanation except by stating that the credits in the balance-sheet represent liabilities. On the appellant''s side the decision of the Supreme Court in M/s. K.P. Madhusudhanan Vs. Commissioner of Income Tax, Cochin, , the decisions of this Court in Deputy Commissioner of Income Tax Vs. K. Suresh Kumar, and in ITO v. C.D. Joseph (Late) reported in [2004] 266 ITR 609 are relied on. Learned Counsel appearing for the assessee contended that even though the assessee did not offer any explanation, the assessee offered the amounts as income and as per the assessment remitted the tax, though the assessment was under contest. It is not a case where the assessee did not offer any explanation but the assessee explained the credit shown in the balance-sheet as liability to subscribers of kuri though the assessee could not prove the same. He further contended that the assessee has offered to pay the tax and in fact remitted the tax on assessment though the assessment was contested in appeals. According to learned Counsel for the respondent, no penalty can be levied if explanation offered is bona fide and the bona fides of which is evident from payment of tax without further contest after the Tribunal decided the appeal.

We are unable to uphold the order of the Tribunal for the reason that the Tribunal has wrongly cast the burden on the Department to prove the entry in the assessee''s accounts. Explanation 1 to Section 271(1)(c) says that if the assessee fails to offer any explanation in respect of any factual material for the computation of its total income or if the explanation offered is found to be not bona fide, it will be presumed that the amount added or disallowed in computing the total income of the assessee as a result thereof shall be the income in respect of which the assessee has concealed the particulars as already stated. This is a case where the additions proposed or credit shown in the balance-sheet as liability pertaining to kuries terminated during 1977 to 1983. It was for the assessee to explain how the entries represent liability for the assessee. Even though the Tribunal has already accepted this position in the assessment appeal, the Tribunal cancelled the penalty for the reason that the Assessing Officer failed to explain the nature of concealed income. We are of the view that the Tribunal wrongly cast the burden on the Department and against the statutory provision. Only the assessee can explain the entries in the balance-sheet and in the absence of any explanation, the Assessing Officer is free to draw reasonable inference. Having regard to the nature of business, there is nothing wrong in the Assessing Officer treating the income as auction discount forgone by defaulter-subscribers. In fact on this specific query raised by the Assessing Officer in the course of assessment, the assessee kept silent. Besides this, the assessee itself transferred part of the amount credited under the liabilities side towards income and offered tax in the year also. Therefore, there is virtual admission by the assessee that at least part of the amount shown as liability represents income. No claim by subscribers is maintainable under law as the chitties, to which credits pertain were terminated nearly 6 to 16 years prior to the relevant accounting period.

Therefore, we do not find any bona fide in the assessee retaining the amount in the liabilities side of the balance-sheet. The assessee was very much aware that the credit shown in the balance-sheet does not represent liability that the assessee itself was conveniently transferring amounts to the profit and loss account. Therefore, we find that the explanation offered by the assessee is not only not proved, but was made without any bona fide. We are, therefore, of the view that the Tribunal''s order casting burden wrongly on the Department is against the statutory provisions. We, therefore, decide the question above stated in favour of the Revenue and against the assessee and consequently allow the appeal by cancelling the order of the Tribunal and restoring the penalty order. There is no scope for interference with the quantum of penalty levied because the penalty levied is minimum amount payable under the Act.