Commissioner of Income Tax vs M.P.V. Sundaramier and Co.

Ramanujam, J.—The assessee is a firm carrying on business in Indian and foreign yarn. In the assessment year 1954-55, the assessee filed

its return showing an income of Rs. 14,806 consisting of income from dividends of Rs. 1,425 and income from business of Rs. 13,381, on the

basis of its books of account. The Income Tax Officer, however, did not accept the said return, but proceeded to make the following three

additions to the income returned: (1) Rs. 58,000 being the discrepancy in stock of Japanese yarn between book figures and bank records ; (2) Rs.

15,000 being the discrepancy in art silk yarn between book figures and bank figures; and (3) Rs. 47,675 being the under-valuation of closing stock

of silk yarn. The result was that the business income of the assessee was determined at Rs. 1,31,599.

There was an appeal against the said assessment. The Appellate Assistant Commissioner agreed with the Income Tax Officer that there was a

case for making additions in view of the discrepancies, but he reduced the first two additions to Rs. 47,800 and Rs. 11,505, respectively. The

assessee did not dispute the third addition of Rs. 47,675.

The Income Tax Officer had initiated penalty proceedings u/s 28(1)(c) of the Indian Income Tax Act, 1922, on March 30, 1959, and after

issuing the show-cause notice and after hearing the assessee, levied penalty of Rs. 43,000 after getting the requisite approval of the Inspecting

Assistant Commissioner. There was an appeal against the said levy of penalty before the Appellate Assistant Commissioner. Before him various

contentions were raised. One of the contentions put forward by the assessee was that even assuming that penalty was leviable, for the purpose of

working out the quantum of penalty, the tax payable on the items of income concealed should alone be taken into account and that there is no

justification for levying a penalty of Rs. 43,000. The Appellate Assistant Commissioner, however, did not accept the assessee''s said contention.

He, therefore, confirmed the penalty of Rs. 43,000.

On appeal, the Tribunal held that only one item of concealment to the extent of Rs. 11,505 has been established and that the other two items

cannot be taken to be items of concealment. It, however, held that penalty u/s 28(1)(c) is justified. As regards the quantum of penalty, the Tribunal

accepted the assessee''s submission and held that ""it would be quite proper to take into account the tax actually avoided in so far as it is referable

to the actual concealed income"" and, in that view, the Tribunal ultimately reduced the penalty to a sum of Rs. 5,000.

Aggrieved against the saicl order of the Tribunal, the revenue sought this reference and the following question of law is referred :

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in reducing the penalty levied u/s 28(1)(c) of the Indian

Income Tax Act, 1922 ?

Mr. Jayaraman, the learned counsel for the revenue, submits that the view taken by the Tribunal on the quantification of the penalty cannot be

sustained in view of the decision of the Supreme Court in Mansukhlal and Brothers Vs. Commissioner of Income Tax, Bombay City II, , where it

has been clearly ruled that, irrespective of the quantum of income concealed, the maximum penalty has to be determined with reference to the

amount of tax that would have escaped assessment had the income shown in the return filed by the assessee been accepted as correct. According

to the Supreme Court, the language of Section 28(1)(c) does not enable the penalty being restricted to the tax evaded by reason of concealment.

The Tribunal when it expressed the view that the tax actually avoided in so far as it is referable to the actual concealed income should alone be the

basis for fixing the penalty, did not have the benefit of the views expressed by the Supreme Court in the above-said decision. In the light of the said

Supreme Court decision, the Tribunal''s view cannot be held to be right in this case.

But Section 28(1)(c) only fixes the maximum limit for the levy of a penalty and there is always a discretion left with the Tribunal to fix such

penalty as is reasonable in the circumstances. The Tribunal has said that in view of the various extenuating circumstances, a levy of penalty of Rs.

5,000 would be adequate and reasonable. The Tribunal has not, however, stated as to what are the extenuating circumstances. But from its order,

we can presume that it took into account the circumstance that out of three items of additions aggregating to Rs. 1,20,675, only one item (Rs.

11,505) has been found to be a concealment. The said circumstance cannot be said to be irrelevant or extraneous. Though the Tribunal has

proceeded on a wrong interpretation of the provisions of Section 28(1)(c) as stated earlier, we are not in a position to say that the Tribunal has not

properly exercised its discretion on the facts and circumstances of this case. The result is, though the revenue succeeds in setting aside the view of

the Tribunal on the question of law, the reduction of penalty to Rs. 5,000 in the circumstances was not improper or unjustified. The reference is

answered accordingly against the revenue. No costs.