Commissioner of Income Tax vs Punjab Kesari Hosiery Factory

The following questions of law have been referred for the opinion of this court by the Income Tax Appellate Tribunal, Chandigarh, arising out of its order dated August 31, 1976, in respect of the assessment year 1967-68:

(1) Whether on a proper interpretation of Section 271(1)(c) of the Income Tax Act, 1961, the Appellate Tribunal is right in law in holding that where a case falls under the Explanation to Section 271(1)(c), only the minimum penalty is leviable u/s 271(1)(iii)?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the main provision of Section 271(1)(c) of the Act and the provisions of the Explanation thereto are mutually exclusive so that they cannot operate in the same field?

(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in deleting the penalty levied u/s 271(1)(c) of the Act in respect of the addition of Rs. 1,26,000, the admitted value of the stock which was not accounted for?

The facts of the case, as noticed in the statement of case, submitted by the Tribunal, are as under:

The assessee is a registered firm which was manufacturing, selling and exporting goods. The assessment year involved is 1967-68 for which the relevant accounting period ended on March 31, 1967. Return of income was filed on October 31, 1967, showing total income of Rs. 3,15,450 and it was further revised on February 28, 1973, in which income was shown in a sum of Rs. 3,17,641. The assessment was framed u/s 143(3) of the Income Tax Act, 1961 (for short, "the Act") on February 28, 1973, as per which total income was determined at Rs. 7,59,120. By a letter dated July 24, 1972, the assessee contended that according to Section 153 of the Act, the assessment should have been completed by March 31,1967, and that not having been done the assessment had become ''time barred'' and, therefore, was a nullity. The Income Tax Officer rejected the said contention of the assessee and observed that the case fell within the mischief of Section 271(1)(c) of the Act and, therefore, under the provisions of Section 153(1)(b) of the Act, limit of eight years from the end of the assessment year in which income was first assessable, applied. The Income Tax Officer in this context referred to his notices dated November 6, 1971, and December 22, 1971, under Sub-section (3) of the Act pointing out that various defects and discrepancies had been noted which were the basis for bring in the provisions of Section 271(1)(c) read with Section 153(1)(b) of the Act. He further stated that his predecessor had duly recorded his satisfaction regarding the assessee being guilty of concealment of income within the meaning of Section 271(1) of the Act.

The matter was carried by the assessee before the Appellate Assistant Commissioner, who did not agree with the Income Tax Officer that the assessee''s case was covered by the provisions of Section 153(1)(b) of the Act, as, according to him, there was no positive evidence on record to prove that the assessee was guilty of concealment of income within the meaning of Section 271(1)(c) of the Act. The Tribunal, while adjudicating the penalty appeal, took note of the above observations and finding in order to point out that unless there were shown to have been disturbed or vacated, it was difficult to go with the Revenue that mere assessment or certain additions which happened to be substantially modified by the Appellate Assistant Commissioner, the Commissioner of Income Tax as also by the Tribunal could have the effect of penalising the assessee on the charge of concealment with the help of the main provisions of Section 271(1)(c) of the Act. According to the Appellate Assistant Commissioner, the letters dated November 6,1971, and December 22, 1971, written by the Income Tax Officer to the assessee sought clarification and reconciliation of certain discrepancies noticed in the books of account and did not have the effect of establishing any concealment within the meaning of Section 271(1)(c) of the Act. The Appellate Assistant Commissioner further observed that a request from the assessee for entering into a settlement with the Commissioner of Income Tax (agreeing to be assessed in respect of certain shortage in the closing stocks to the tune of Rs. 1,96,000) was not an admission on the part of the assessee of any concealment of income. The Appellate Assistant Commissioner, however, did not accept the assessee''s case that the assessment was void as, according to him, the provisions of Section 139(4) of the Act were wide enough to cover not only a late but even a revised return after filling of the belated return. The Appellate Assistant Commissioner was also of the opinion that a return u/s 139(4) of the Act could be filed at any time before the end of the period mentioned in Clause (b) and such a return could be an original or a revised return. Therefore, according to the Appellate Assistant Commissioner, extended time limit of one year u/s 153(1)(c) of the Act would apply to an original or a revised return u/s 139(4) of the Act. The assessee and the Revenue both felt aggrieved by this decision of the Appellate Assistant Commissioner. The assessee filed a regular appeal and the Revenue a cross-objection.

The Tribunal, however, did not agree with the assessee''s plea. The Tribunal further noted the above facts with a purpose in mind that even before framing the assessment, the Income Tax Officer had recorded his satisfaction of concealment and it is not a case where difference of 20 per cent. between returned and assessed income was meant to be utilized for levying penalty. While framing the assessment, the Income Tax Officer recorded his charge of concealment on February 28, 1973, in respect of three additions as follows:

__________________________________________________________________________ Rs. (i) Unaccounted for woollen yarn and stock pledging with 2,45,600 the bank (paragraph 5 of the ITO''s order) (ii) Unaccounted for bank deposits Union Bank of India, 65,696 Bombay (paragraph 6 of the ITO''s order) (iii) Extra profit on wool tops (paragraph 8 of the ITO''s 42,230 order) __________________________________________________________________________

The addition of Rs. 65,695 was deleted by the Commissioner of Income Tax by an order u/s 264 of the Act and addition of Rs. 42,230 was vacated by the Tribunal in the quantum appeal in I.T.A. No. 603 of 1973-74, which had become final. The addition of Rs. 2,45,600 was reduced by the Appellate Assistant Commissioner to Rs. 2,11,000 and at the Tribunal''s stage it further came to be reduced and retained at Rs. 1,26,000 on the ground entirely different than the one on which the original addition in a sum of Rs. 2,45,600 was made. The Tribunal while reducing the said addition in a sum of Rs. 1,26,000 observed that it was not on account of concealment of closing stock but there was an omission of not accounting for certain stocks. The benefit of enhancement of opening stock was allowed in the following year. The Inspecting Assistant Commissioner in paragraph 8 of his order held that the assessee concealed the particulars of its income in respect of Rs. 2,11/000 and was liable to penalty. When this penalty was levied, the matter was not adjudicated by the Tribunal. The Inspecting Assistant Commissioner noted in clear terms that the assessee was liable to penalty under the Explanation to Section 271(1)(c) of the Act in respect of addition of Rs. 65,695 and Rs. 42,230 and the assessee''s filing of its return at Rs. 3,17,641 clearly brought it within the ambit of penalty provisions. As observed above, the two additions of Rs. 65,695 and Rs. 42,230 were ordered to be deleted one by the Commissioner of Income Tax and the other by the Tribunal. The Inspecting Assistant Commissioner after observing that the assessee concealed the particulars of taxable income in respect of Rs. 2,11,000 held that the facts connected with this part of concealment of income were very heavy and, therefore, it was not a case of minimum penalty of 100 per cent, but was a fit case for levy of 150 per cent. The result was that with regard to the addition of Rs. 2,11,000, penalty was worked out at 150 per cent, and with regard to other two items at 100 per cent, was considered sufficient. This resulted in an imposition of penalty of Rs. 4,25,000.

When the assessee came before the Tribunal against the imposition of penalty of Rs. 4,25,000, by that time only addition of Rs. 1,26,000 out of the addition of Rs. 2,11,000 was sustained. The Tribunal in paragraph 10 of its order noted that on the facts of the case and keeping in view the Inspecting Assistant Commissioner''s order particularly paragraphs 8 and 9, there was no doubt that the Revenue charged the assessee with actual concealment and the Inspecting Assistant Commissioner''s reference to the Explanation u/s 271(1)(c) was entirely superfluous and wrong. The Tribunal in paragraphs 10 and 11 of its order dealt with the facts and in paragraph 12 recorded the assessee''s contention. The Tribunal, however, in paragraph 14 of its order rejected the assessee''s contention that a charge under the Explanation should be separately handed over to it. The Tribunal accepted the assessee''s contention that since the phantom created by the Revenue by making additions totalling Rs. 4,25,000 had simply vanished because of the Tribunal''s decision in the quantum appeal, the Inspecting Assistant Commissioner''s decision for levy of penalty cannot survive. The Tribunal also accepted the contention raised for the assessee that omission cannot give rise to any punishment for concealment. The Tribunal in paragraph 15 of its order absolved the assessee from charge of concealment and in paragraph 17 cancelled the penalty on three counts detailed therein.

We find that though the questions have to be answered against the assessee to the effect that the Explanation is part of the main provision as held by the hon''ble Supreme Court in M/s. K.P. Madhusudhanan Vs. Commissioner of Income Tax, Cochin, and no express invocation of the Explanation to Section 271 was required in a notice u/s 271 of the Act, the Explanation being part of the provision itself, from the findings recorded by the Tribunal, we do not find that any error has been committed by the Tribunal in deleting the penalty, levied on the assessee u/s 271(1)(c) of the Act on appreciation of material on record. Accordingly, we answer question No. 3 against the Revenue and in favour of the assessee.

The reference is disposed of, accordingly.