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Judgment
Ramanujam, J.—At the instance of the Revenue, the following question has been referred to this court for its opinion :
Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provisions of section 271(1)(c) of the
Income Tax Act, 1961, are not attracted to the assessee''s case for the assessment year 1966-67 ?
The assessee, in this case, is a film producer. For the assessment year 1966-67, he filed a return disclosing business income of Rs. 6,995. Before
the ITO could complete the assessment, there was a search of the assessee''s premises on May 11, 1966, when some incriminating documents and
accounts had been seized, one of such documents being a note book, identified as No. 5. The ITO compared the entries in the said note book
with those in the regular books of account and found that the assessee had shown some excess expenditure in the regular books and from that he
inferred that the claims for expenses were inflated to the extent of Rs. 32,275. The ITO also noticed that in the regular accounts, there was a deficit
of Rs. 15,868 when compared with note book No. 5. However, the ITO added both the differences and treated an amount of Rs. 50,000 as
omission in the income shown. He also took note of various credits amounting to Rs. 1,53,159 and added the same to the total income. Thus, the
ITO finally computed the total income at Rs. 2,00,000.
The assessee appealed to the AAC, who had deleted the addition of Rs. 1,53,159 in respect of various credits. He, however, sustained the
addition of Rs. 50,000.
Thereafter, the matter was taken to the Income Tax Appellate Tribunal and the Tribunal taking note of the various other circumstances held that the
addition should be restricted to Rs. 25,000 as against Rs. 50,000 sustained by the AAC.
Subsequently, the IAC initiated penalty proceeding under s. 271(1)(c) of the I.T. Act, hereinafter referred to as ""the 1961 Act"". In those
proceedings, the IAC found that the expenses debited in the regular books of account in respect of several items were higher than the expenses
noted in note book No. 5, leading to the conclusion that the expenses were inflated. It was also found that the debits in the note book No. 5 were
higher than the debits in the regular books of account. The IAC also stated that the ITO had concluded in the regular assessment that these excess
payments were made out of unaccounted incomes and, therefore, these should be considered as concealed income of the assessee. The assessee,
however, contended that it was not fair to take the excess debit in the regular books alone and not give a set-off towards the excess debits in the
other book, namely, note book No. 5, and that if the two books were taken together, there would be a net excess of only Rs. 16,414 which
compared favourably with the credits in the capital account which had already been offered for assessment. However, the IAC held that all the
excess payments in note book No. 5 might not qualify for set off against the excess expenditure in the regular books and that the same would lead
to the inference that payments had been made out of unaccounted income. He, however, found that some expenses like, office expenses, car
insurance, house expenditure, etc., aggregating to Rs. 3,640 could not be taken into account for the levy of penalty. Therefore, the concealed
income of Rs. 43,005 as per the ITO minus Rs. 3,640 was taken to be the concealed income which would attract the levy of penalty.
The order of the IAC levying penalty was taken to the Income Tax Appellate Tribunal. The Tribunal taking note of the fact that in the assessment
proceedings it had sustained an addition of Rs. 25,000 on an estimate basis, held that the said addition having been made on the basis of the
estimate, it would not attract s. 271(1)(c) of the 1961 Act. According to the Tribunal, the concealment having been inferred from different amounts
of expenditure mentioned in the regular books and in the seized book and the assessee himself having offered a sum of Rs. 13,522 which in the
view of the AAC is with reference to the discrepancies, there is no contumacious conduct on the part of the assessee and, therefore, the assessee
has not been shown to be grossly negligent in understating the income. In that view, the Tribunal set aside the levy of penalty.
Thus, on the facts of this case, the question is, whether s. 271(1)(c) of the 1961 Act is attracted. Section 271(1)(c) is as follows :
271(1). If the Income Tax Officer or the Appellate Assistant Commissioner or the Commissioner (Appeals) in the course of any proceedings
under this Act, is satisfied that any person - ......
(c) has concealed the particulars of his income or furnished inaccurate particulars of such income,
he may direct that such person shall pay by way of penalty,............
(iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed twice,
the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such
income :
Provided that, if in a case falling under clause (c), the amount of income (as determined by the Income Tax Officer on assessment) in respect of
which the particulars have been concealed or inaccurate particulars have been furnished exceeds a sum of twenty-five thousand rupees, the Income
Tax Officer shall not issue any direction for payment by way of penalty without the previous approval of the Inspecting Assistant Commissioner.
Having regard to the above provision, the question for our consideration is, whether on the facts and in the circumstances of this case, the assessee
can be taken to have concealed particulars of his income or furnished inaccurate particulars of such income. As already stated, originally the
assessee filed a return disclosing business income of Rs. 6,995 after deducting the net loss of Rs. 6,528. Thus, it will be seen that the income
offered for assessment is Rs. 13,522. But the said return was not accepted by the ITO, in view of the entries found in the note book No. 5. On the
basis of the entries in the said note book, two additions came to be made, namely, (1) a sum of Rs. 1,53,159 towards various credits which found
a place in the note book No. 5; and (2) a sum of Rs. 50,000 treated as omiss ion in the income shown. The addition of Rs. 1,53,159 was set aside
by the AAC on appeal. On a further appeal, the Tribunal restricted the addition sustained by the AAC to Rs. 25,000. In the penalty proceedings,
the Tribunal held that though the addition of Rs. 25,000 was sustained on the basis of an estimate, the concealment could not be inferred nor would
it amount to actual concealment of income by the assessee. It further held that as the addition sustained by it was only on an estimate, the penalty
provision under s. 271(1)(c) of the 1961 Act would not be attracted.
Thus, the question is whether the view taken by the Tribunal that wherever an addition has been made to the returned income on the basis of an
estimate, the provision under s. 271(1)(c) of the 1961 Act is not applicable is legally tenable. On the wording of s. 271(1)(c), it is not possible to
accept the said view of the Tribunal. In the present case, the assessee has submitted a return, which, if it had been accepted by the ITO, would
have resulted in an under-estimate of the income. As already stated, it is because of the seizure of a certain anamath note book No. 5 which
contained certain credit and debit entries, not found in the assessee''s regular books of account, the additions came to be made to the income
returned by the assessee. If the return submitted by the assessee had been accepted without reference to the entries found in the anamath account
book, it would have resulted in an underestimate or non-disclosure of the assessee''s income. As a matter of fact, in this case, the ITO had made
the addition only on the basis of the entries found in the anamath account book, and not on the basis of an estimate. It is only when the matter came
before the Tribunal, the Tribunal, based on its estimate, reduced the addition to Rs. 25,000. Merely because the addition sustained was on the
basis of an estimate, it cannot be said that s. 271(1)(c) of the 1961 Act will not be attracted. If the anamath account book formed the basis of an
addition to the income returned, whether addition is by way of an estimate or actuals, the assessee should be taken to have furnished inaccurate
particulars of his income, for, he had submitted a return disclosing only an income of Rs. 13,522. It is not, therefore, possible for us to hold that the
assessee had not furnished inaccurate particulars of his income.
As a matter of fact, the view taken by the Tribunal that if the addition to the income returned is based on an estimate, the penalty provision will not
stand attracted appears to be not only inconsistent with the statutory provision in s. 271(1)(c) of the 1961 Act, but also with the decisions
rendered in the following cases :
Cement Distributors Private Ltd. Vs. Commissioner of Income Tax, was a case more or less similar to the case before us. In that case, the
assessee had resorted to recording of bogus transactions in order to display income at a much lesser figure. The assessee had made a claim for
deduction of over Rs. 2 lakhs as trading loss in the purchase and sale of shares. The ITO found that the transactions of purchase and sale of shares
in which the assessee claimed to have incurred loss were not genuine and, therefore, the trading loss was not allowed. A question arose whether
penalty could be imposed under s. 28(1)(c) of the Indian I.T. Act, 1922, hereinafter referred to as ""the 1922 Act"", which corresponds to s. 271(1)
(c) of the 1961 Act. This court has taken the view that since the assessee has deliberately furnished inaccurate particulars of income by displaying
income at much lesser figure by recording bogus transactions, the penalty provision will stand attracted.
A.K. Bashu Sahib Vs. Commissioner of Income Tax, Madras, was a case, where the assessee had estimated his income and that had been
rejected by the ITO, who made his own estimate of the assessee''s income. The question arose whether penalty proceedings under s. 28(1)(c) of
the 1922 Act could be invoked. The assessee had contended, in that case, that no concealment of income or furnishing of inaccurate particulars
could be inferred from the differences between the estimates made by the assessee and the one made by the ITO. But this contention was rejected
by the AAC as well as the Tribunal. When the matter came before this court, it was observed that the assessee must have been aware of his real
income when he made the estimate of his income deliberately at a lower amount, that it cannot be said that in all cases where the taxing authorities
estimate the income at a higher figure than that estimated by the assessee, no penalty was leviable, that where the estimate of the assessee
amounted to a deliberate under-statement, an inference of concealment of income could certainly be drawn and that as the assessee in that case
had deliberately underestimated his income, he could be taken to have concealed his income.
Additional Commissioner of Income Tax Vs. E. Bhoopathy, was also a case where the assessee had filed a return estimating his income and the
ITO rejected that estimate and made his own estimate. When the penalty proceedings were initiated, the Tribunal cancelled the same on the
ground that the assessment was based on a guess work or an estimate and that, therefore, the levy of penalty was not justified. When the matter
came to this court, this court expressed the view that the assessment by the ITO for the assessment years 1963-64 to 1965-66 was not based on
mere guess work, but was based on the statements of assets and liabilities filed by the assessee in wealth-tax proceedings showing an increase in
his net wealth, and that, therefore, in respect of such an estimate of income, which was also accepted by the assessee, penalty could be levied. This
court took note of the following facts while sustaining the penalty, (1) the Tribunal had not applied its mind properly to the facts of the cases
relating to the said three assessment years; (2) the ITO had only made an estimate on the basis of statements of assets and liabilities filed by the
assessee; (3) the assessee did not produce any accounts for the relevant years, but had accepted the estimate made by the ITO; and (4) there is
clear scope for holding that the assessee had concealed his particulars of income or filed inaccurate particulars thereof in the three relevant years
and the difference between the assessed income and the returned income would represent concealed income.
In Rathnam and Co. Vs. Inspecting Assistant Commissioner and Another, , this court again reiterated that merely because the addition came to be
made to the income returned by the assessee by way of an estimate, the applicability of s. 271(1)(c) of the 1961 Act could not be ruled out. The
assessments of the assessee in that case were completed by making certain additions to the income returned and thereafter penalty proceedings
under s. 271(1)(c) of the 1961 Act had been initiated. For the assessment year 1963-64, the assessee had agreed for the addition made towards
the low gross profits disclosed. The penalty levied for the said assessment year was sustained by the Commissioner to whom a revision had been
filed against the order of levy of penalty. When that order was challenged in a writ petition, this court held that the inference drawn by the ITO and
the Commissioner that the petitioner should be taken to have deliberately concealed the particulars of his income by his conduct in agreeing to the
addition being made to his income was justified. This court specifically rejected the contention of the assessee that since the ITO did not reject the
assessee''s accounts, but had made an addition to the income disclosed by the books on the basis that the gross profit shown in the books of
account was considerably low, the addition would not attract s. 271(1)(c) of the 1961 Act. This court held that, on the facts of that case, the
addition made by the ITO to the income returned would call for the application of the penalty provision.
In Commissioner of Income Tax Vs. Mir Mohamed Ali, , this court again rejected the contention of the assessee that as the income had been
estimated by the ITO, the penalty provision could not legally be sustained. In that case, the assessee did not submit any return for the assessment
year 1961-62 in respect of operation of two lorries on the ground that the lorries had been sold by him in that year. The registration of the lorries,
however, stood in the name of the assessee till March 31, 1962. The assessee also was not in a position to furnish the exact particulars of the
alleged purchasers of the lorries to enable the ITO to make an enquiry. Consequently, the ITO estimated the income from the lorries for the
assessment years 1961-1962 and 1962-63 and the same was ultimately confirmed by the Tribunal. When the penalty proceedings were initiated,
the assessee resisted the same and the Tribunal deleted the penalty. When the matter was taken to this court, this court found that with regard to
the additions made by the ITO towards the income from the lorries, the assessee had not produced any evidence to show that the lorries had been
sold as stated by him and held that the fact that the permits of the lorries continued to stand in the name of the assessee clearly indicated that the
assessee put up false claims, that as such the assessee had deliberately concealed his income from the running of the lorries and that, therefore, the
Tribunal was in error in deleting the penalty levied as regards the concealment of income from the lorries.
Thus, the decision of the Tribunal in this case runs counter to the uniform view taken by this court in the above decisions wherein the penalty
provision has been applied even in cases where assessment is made on the basis of an estimate or where an addition towards concealment has
been made on the basis of an estimate. We cannot, therefore, sustain the view taken by the Tribunal in this case.
The learned counsel for the assessee relies on a decision of the Supreme Court in Commissioner of Income Tax (Central), Calcutta Vs. Ashoka
Marketing Ltd., , in support of his submission that, since, in the present case, the assessee himself had filed a return showing his income at Rs.
13,522 taking note of the entries found not only in the regular accounts but also in the anamath account, note book No. 5, it cannot be taken that
the assessee had concealed any portion of his income or that he had furnished any inaccurate particulars of his income. In the above decision of the
Supreme Court, the ITO made the assessment after rejecting certain claims made by the assessee for deduction. However, before the AAC, the
assessee abandoned one of its claims. Later, the ITO initiated penalty proceedings under s. 28(1)(c) of the 1922 Act for concealment of income to
the extent of Rs. 54,36,386 comprising of two sums in respect of which the assessee made a claim for deduction. When the matter reached the
Tribunal, the Tribunal accepted the explanation of the assessee that to avoid protracted proceedings a compromise was effected between the
parties and that, therefore, the case did not call for the application of the penalty provision. When the Revenue sought a question to be referred to
the High Court under s. 66(2) of the 1922 Act, that application was rejected and the said rejection was upheld by the Supreme Court on the
ground that no question of law arose from the order of the Tribunal. We do not see how the said decision will be an authority for the proposition
that in all cases, where assessment is made on the basis of an estimate or where an addition towards concealment is made on the basis of an
estimate, the penalty provision cannot be invoked.
We are of the view that even where an assessment is made on the basis of an estimate or where an addition to the income disclosed is made on the
basis of an estimate, the penalty provision under s. 271(1)(c) of the 1961 Act is applicable. In this view of the matter, we answer the question in
the negative and against the assessee.
Since the Tribunal has not gone into the quantum of penalty, as it set aside the penalty on the ground that s. 271(1)(c) of the 1961 Act will not
stand attracted, the matter is remitted to the Tribunal for the purpose of determining the quantum of penalty now that we have sustained the penalty
proceedings.
The assessee will pay the costs of the Revenue. The counsel''s fee is Rs. 500 (Rupees five hundred only).