J.K. Synthetics Ltd. vs Commissioner of Income Tax

R.K. Agrawal, J.—The present appeal u/s 260A of the income tax Act, 1961 (hereinafter referred to as "the Act"), has been filed against the order dated March 28, 1999, passed by the income tax Appellate Tribunal, Bench Allahabad. It relates to the assessment year 1979-80 in respect of the penalty imposed u/s 273(2)(a) of the Act. The appeal has been admitted by this court, vide order dated October 3, 2006, on the following substantial questions of law:

(A) Whether the income tax Appellate Tribunal was legally right in not quashing the penalty proceedings u/s 273(2)(a) of the Act where it is admitted that no such proceedings were proposed in the draft assessment order nor any directions u/s 144B of the Act were given by the Inspecting Assistant Commissioner of income tax in his order to the assessing authority to take such proceedings in the present case?

(B) Whether having regard to the contents of the two letters dated December 1, 1978, and December 7, 1978, the finding of the income tax Appellate Tribunal that the appellant has not been able to specify the reason for filing the wrong estimate and also to specify the reason as to why the appellant considered the depreciation and investment allowance on the machinery which was yet to be installed for computing its income liable to advance tax is not perverse and vitiated in law?

(C) Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal was legally correct in not recording independent finding and considering various material on record with respect to the reasonableness of the appellant for filing the estimate of income liable to advance tax?

Briefly stated, the facts giving rise to the present appeal are as follows:

The appellant is a public limited company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of manufacture and sale of synthetic fibers, cement, etc. Its accounting year is the calendar year. For the assessment year 1979-80, relevant to the accounting year ending on December 31, 1978, the appellant filed its return of income on November 2, 1979 declaring a total income of Rs. 7,74,88,130. The income tax Officer, Central Circle, XVIII, New Delhi, who was the assessing authority of the appellant, passed an order on January 4, 1982, u/s 143(3) read with section 144B of the Act proposing to make variation to the returned income of more than Rs. 1,00,000 to which the appellant filed objections, vide letter dated January 7, 1982. The Inspecting Assistant Commissioner of income tax (Central) Range III, New Delhi, to whom the draft assessment order as also the objections were referred, after considering the matter, issued certain directions to the assessing authority for making the assessment. The assessing authority, vide order dated August 31, 1982, completed the assessment in accordance with the direction given by the Inspecting Assistant Commissioner. He determined the total income at Rs. 11,32,77,699. While passing the assessment order on August 1, 1982, the assessing authority also initiated proceedings for imposition of penalty u/s 273(2)(a) of the Act. It may be mentioned here that for the purposes of payment of advance tax, a notice u/s 210 of the Act was issued on June 12, 1978, requiring the appellant to pay a sum of Rs. 5,73,08,130. The appellant filed an estimate of advance tax on June 14, 1978, in which the income declared was nil and, consequently, no amount was paid towards advance tax. The estimate was revised on December 14, 1978, estimating the income at Rs. 3,83,00,000 on which the tax chargeable came to Rs. 2,21,18,000, which was paid on December 15, 1978. Against the estimate of income at Rs. 3,83,00,000 disclosed by the appellant for the purposes of payment of advance tax, it returned an income of Rs. 7,74,88,133, which was assessed at Rs. 11,32,77,699.

On these facts, the Assessing Officer came to the conclusion that the estimate of advance tax filed by the appellant was too low which it knew or had reason to believe to be untrue. A penalty notice was issued to the appellant to show cause as to why penalty should not be levied for filing wrong estimate of advance tax, which was duly replied, vide letter dated September 28, 1988. In reply, an objection was taken by the appellant that as the assessing authority had not proposed initiation of penalty proceeding u/s 273(2)(a) in the draft assessment order, he cannot initiate penalty proceedings thereafter. On the merits, it was submitted that the burden of proof that the estimate of advance tax filed by the appellant was untrue to the knowledge of the appellant, lay on the Department and as there is no material on record to hold that the estimate filed by it was untrue, penalty proceedings cannot be legally, initiated. The estimate of advance tax filed on December 14, 1978, was justified on the basis of the reports, dated December 1, 1978, and December 7, 1978, received from the project department, in which it had been stated that certain machineries which had been purchased, would be installed before the close of the accounting year, entitling the appellant to claim depreciation, etc., on their value. A plea was also raised that merely because the returned income shown by the appellant was higher than the income shown by the appellant, it could not be automatically inferred that the estimate filed was untrue to the knowledge or belief of the appellant. The Assistant Commissioner of income tax, Central Circle, XVIII, New Delhi, who had then become the assessing authority of the appellant, rejected the objection/explanation given by the appellant and passed an order u/s 273(2)(a) of the Act imposing a penalty of Rs. 15,00,000.

Feeling aggrieved, the appellant preferred an appeal before the Commissioner of income tax (Appeals), DC New Delhi, who, vide order dated April 10, 1989, had allowed the appeal. The Commissioner of income tax (Appeals), while rejecting the plea advanced by the appellant that the proceeding for imposition of penalty should have been initiated while passing the draft assessment order and the estimate of advance tax filed by it was not untrue to its knowledge and belief, had allowed the appeal only on the ground of limitation.

The appellant as also the Revenue, feeling aggrieved, preferred separate appeals before the Tribunal. The Tribunal, by the impugned order, had dismissed the appeal preferred by the appellant whereas it had allowed the Revenue''s appeal. It had held that the order of penalty had not been passed beyond the prescribed period of limitation. It had upheld the findings of the Commissioner of income tax (Appeals) on the merits of the matter.

We have heard Sri. R.S. Agrawal, learned counsel appearing for the appellant, and Sri R.K. Upadhyaya, learned senior standing counsel, appearing for the Revenue.

Sri. R.S. Agrawal relying upon a decision of the Gujarat High Court in the case of Commissioner of Income Tax Vs. Maharaja Exhibitors, , has submitted that if in the draft assessment order there is no mention about initiation of proceeding for imposition of penalty, the assessing authority cannot initiate penalty proceeding while passing the final assessment order pursuant to the direction given by the Inspecting Assistant Commissioner. According to him, in view of the decision of the apex court in the case of Central Provinces Manganese Ore Co. Ltd. Vs. Commissioner of Income Tax, , penalty is nothing but an additional tax and is a part of the process of assessment, like that of levy of interest.

He further submitted that before a penalty can be imposed, the entirety of the circumstances must be taken into account and the mere falsity of explanation given by the assessee is insufficient without there being, in addition, cogent material or evidence from which the necessary conclusion attracting a penalty could be drawn. He relied upon a decision of the apex court in the case of Anantharam Veerasinghaiah and Co. Vs. Commissioner of Income Tax , Andhra Pradesh, .

According to him, the estimated income may or may not be the same as that of the returned income shown by the assessee and the very word "estimate" implies the concept of presumption and it may never be accurate. In this view of the matter, he submitted that the Tribunal was not justified in upholding the order of the Commissioner of income tax (Appeals) that the appellant knew that the estimate filed by it was untrue. In support of his aforesaid plea, he has relied upon a decision of the Bombay High Court in the case of Hind Products Pvt. Ltd. Vs. Commissioner of Income Tax, Bombay City-1, and of the Calcutta High Court in the case of Commissioner of Income Tax Vs. Birla Cotton Spinning and Weaving Mills Ltd., .

Relying upon a decision of the hon''ble Supreme Court in the case of Commissioner of Income Tax, Ahmedabad Vs. Sarabhai Holdings Pvt. Ltd., he submitted that in view of the specific language of section 273(2)(a) of the Act there has to be a satisfaction of the assessing authority that the estimate of the advance tax furnished by the appellant was not only untrue but the assessee also knew or had reason to believe the same to be untrue, which, in the present case, is not the position.

He has further submitted that the Tribunal being the last fact-finding authority, ought to have given its independent reasons even if it had to concur with the findings recorded by the Commissioner of income tax (Appeals), which, in the present case, having not been done, the order of the Tribunal is liable to be set aside with a direction to be given to the Tribunal to decide the appeal afresh on the merits. He has relied upon the following decisions:

(i) Udhavdas Kewalram Vs. Commissioner of Income Tax, Bombay City I, ;

(ii) Esthuri Aswanthiah Vs. Commissioner of Income Tax, Mysore, ;

(iii) Killick Nixon and Company Vs. Commissioner of Income Tax, Bombay, ;

(iv) Commissioner of Income Tax Vs. Dunlop India Ltd., ; and

(v) Vinjane Centre Vs. Dy. Commissioner of Income Tax, .

Sri. R.K. Upadhyaya, learned senior standing counsel, on the other hand, has submitted that there is no requirement under law for mentioning in the draft assessment order that the penalty proceedings are also proposed to be initiated. As the word implies, the order is a draft order and has not attained finality. It cannot be equated with the final assessment order which may ultimately be passed in terms of the directions given by the Inspecting Assistant Commissioner u/s 144B of the Act According to him, the requirement u/s 273(2) of the Act for initiation of penalty proceeding is that the Assessing Officer, in the course of any proceeding in connection with the regular assessment, should be satisfied. The proceeding for passing regular assessment culminates only after passing of the final order and it is open to an assessing authority to be satisfied regarding the initiation of penalty proceeding while passing the final order. According to him, the decision of the Gujarat High Court, relied upon by Sri. Agrawal, does not lay down the law correctly. He has relied upon a decision of the hon''ble Supreme Court in the case of Karanvir Singh Gossal Vs. Commissioner of Income Tax and Another, wherein the hon''ble Supreme Court has held that the recitation in the assessment order by the assessing authority directing institution of penalty proceedings is not obligatory and penal proceedings could be initiated for such default (levy of interest u/s 234B or section 234C) without specific direction from the Assessing Officer.

He has further submitted that the letter written by the appellant that the machineries to the extent of Rs. 9 crores would be commissioned before December, 1978, is only to give a colour and was not bona fide as it had come on record that even part of the machineries had not been received by that time and the question of its installation or being put to use before the end of the accounting period, did not arise. The appellant had deliberately filed a wrong estimate of advance tax and the penalty has, therefore, rightly been levied.

Relying upon a decision of the hon''ble Supreme Court in the case of Union of India (UOI) and Others Vs. Dharamendra Textile Processors and Others, he submitted that in fiscal statute for imposition of penalty it is not necessary that there should be mens rea on the part of the assessee.

In so far as the question as to whether the Tribunal ought to have given its own findings, even while affirming the view taken by the Commissioner of income tax (Appeals), regarding imposition of penalty on the merits, is concerned, he has submitted that an order of affirmance need not give detailed reasons. In the present case, the Tribunal has recorded that it had concurred with the findings given by the Commissioner of income tax (Appeals) and, therefore, detailed reasons were not required at all for which he has relied upon a decision of the apex court in the case of Commissioner of Income Tax, Bangalore Vs. K.Y. Pilliah and Sons, .

We have given our thoughtful consideration to the various pleas raised by the learned counsel for the parties. We find that u/s 144B of the Act, the Assessing Officer has to forward a draft order containing the variations proposed by him to the assessee and to forward the objections received by him along with the draft order and the record to the Inspecting Assistant Commissioner for his guidance. The Inspecting Assistant Commissioner has to consider the draft order and the objections and to give the directions to the Assessing Officer who has to pass an assessment order in conformity with the direction so given. In the present case, the Assessing Officer in the draft order had not proposed levy of penalty u/s 273(2)(a) of the Act regarding filing of wrong estimate of advance tax. As the words denote, the variations which have been proposed in the order of the Assessing Officer, is the draft order. It cannot be said to be an assessment order in strict sense. The proceeding for imposition of penalty u/s 273(2) of the Act is to be initiated upon a satisfaction recorded by the income tax Officer in the course of any proceeding in connection with the regular assessment. The assessment proceeding would continue till a final assessment order is passed. Making of a draft order would not culminate in the assessment order. Moreover, u/s 144B(1) of the Act, the income tax Officer has to intimate the assessee the variations above the specified limits which he intends to make in the returned income. In our considered opinion, all penalty proceedings be it u/s 273(2) of the Act cannot be said to be covered under the phrase "variation in the income or loss returned by an assessee". Thus, the submission that as there was no proposal to initiate penalty proceeding u/s 273(2) of the Act in the draft order, the Assessing Officer could not have initiated the proceeding for imposition of penalty while passing the final assessment order has no legal basis and cannot be accepted.

In the case of Commissioner of Income Tax Vs. Maharaja Exhibitors, , the Gujarat High Court has held that the object of section 144B of the Act is that the assessee should get an opportunity to represent his case before the Revenue in the event of substantial change being made in his liability. However, after holding so, it had gone further and held that had the assessee known about the direction for issuance of a show-cause notice for imposition of penalty, the assessee could have made a representation and could have stated as to why even such a show-cause notice should not be issued and, in fact the assessee was deprived of this opportunity as the said facts were not incorporated in the draft order which was approved by the Inspecting Assistant Commissioner. The object is to reduce litigation and to give an opportunity to the assessee to represent his case before the final assessment is made and the said purpose would not be fructified if the assessee is not informed with regard to levy of interest or penalty proceeding in the draft order. With respect, we are unable to persuade ourselves to agree with the view taken by the learned judges of the Gujarat High Court in the aforesaid case. As already mentioned hereinbefore, u/s 144B of the Act, the variations proposed in the returned income or loss above the specified limit alone has to be referred to the Inspecting Assistant Commissioner along with the objections of the assessee. The initiation of penalty proceeding u/s 273(2) of the Act would not amount to making a variation in the returned income or loss filed by an assessee. Thus, there is no necessity of proposal to initiate penalty proceeding in the draft order. No doubt, penalty is an additional tax but that would not make it a process of assessment contemplated u/s 143 of the Act.

We are fortified in the view by the decision of the hon''ble Supreme Court in the case of Karanvir Singh Gossal Vs. Commissioner of Income Tax and Another, wherein it has been held that the recitation in the assessment order by the Assessing Officer directing institution of penal proceedings is not obligatory and penal proceedings could be initiated for such default without a specific direction from the Assessing Officer.

In this view of the matter, we are of the considered opinion that the income tax Appellate Tribunal was legally right in not quashing the penalty proceeding u/s 273(2) of the Act on the ground that no such proceedings were proposed in the draft assessment order nor any direction u/s 144B of the Act was given by the Inspecting Assistant Commissioner of income tax in his order to the assessing authority.

Coming to the second question of law referred to us, we find that the assessee had been issued a notice dated June 12, 1978, u/s 210 of the Act requiring him to pay a sum of Rs. 5,73,08,130 as advance tax. The assessee filed its estimate of advance tax on June 14, 1978, declaring nil income and, therefore, did not pay any advance tax because it took into account the excise liability of over Rs. 23 crores. However, the liability had not been accepted and it pertained to earlier years in respect of which it had also obtained a stay order from the Delhi High Court. The excise liability was further reduced Rs. 1.5 crores only. The undisputed excise duty of Rs. 11.86 crores was held to be not correct. However, the assessment was revised on December 14, 1978, wherein the income was estimated at Rs. 3,83,00,000 on which the tax payable came to Rs. 2,21,18,000 which was paid on December 15, 1978. Against the estimated income of Rs. 3,83,00,000, the assessee had returned the income of Rs. 7,74,88,133 which was assessed at Rs. 11,32,77,699. It has come on record in the order of the Commissioner of income tax (Appeals) that the filing of estimate on June 14, 1978, as nil income was on account of the depreciation in investment allowance of acrylic and cement unit II Division in the expectation regarding installation and functioning of certain additions to plant and machinery which calculation went wrong. However, from the estimated capitalisation of machinery worth Rs. 15 crores of acrylic unit machinery worth Rs. 10 crores was installed and functioned and machinery worth Rs. 2 crores were not even received during the year under consideration and machinery worth Rs. 3 crores were installed much later. No explanation was forthcoming except the internal report of the project head. The Commissioner of income tax (Appeals) did not accept this as a reasonable cause for filing the estimate of advance tax which ultimately proved to be false and incorrect. So far as the cement unit No. II is concerned, it has been found that the machinery worth Rs. 5 crores alone was installed and brought in use in the year and machinery worth Rs. 9 crores was not even received by the assessee during the year. The internal report of the project head was disbelieved and this also did not constitute a reasonable cause for filing incorrect estimate of advance tax.

From the narration of the aforesaid facts, it is seen that the assessee had filed an estimate of advance tax which it knew to be wrong or false or untrue and, therefore, penalty had rightly been levied.

In the case of Anantharam Veerasinghaiah and Co. Vs. Commissioner of Income Tax , Andhra Pradesh, which was a case dealing with imposition of penalty u/s 271(1)(c) of the Act, before its amendment in the year 1964, relating to the assessment year 1959-60, following its earlier decision in the case of Commissioner of Income Tax, West Bengal I, and Another Vs. Anwar Ali, , the apex court has held that the burden remains on the Revenue of proving the existence of material leading to the conclusion that the penalty provisions are attracted but the mere falsity of the explanation given by the assessee is insufficient without there being any additional cogent material or evidence from which the necessary conclusion directing the penalty could be drawn. The aforesaid decision relates to a case of imposition of penalty for concealment of income in a pre-1964 situation when the statutory provisions were entirely different. In the case of Union of India (UOI) and Others Vs. Dharamendra Textile Processors and Others, the hon''ble Supreme Court has held that in the fiscal statute the question of mens rea is not relevant while imposing penalty for the default committed. The principle laid down in the aforesaid decision would not be applicable in the present case in view of the specific decision of the hon''ble Supreme Court in the case of Commissioner of Income Tax, Ahmedabad Vs. Sarabhai Holdings Pvt. Ltd., wherein the hon''ble Supreme Court has considered the language of section 273(2)(a) and has held that there has to be a satisfaction of the Assessing Officer that the estimate of the advance tax furnished by the appellant was not only true but the assessee also knew or had reason to believe the same to be untrue. In the present case, we find that the Assessing Officer was satisfied that the advance tax furnished by the assessee was untrue and the appellant also knew or had reason to believe the same to be untrue from the narration of the facts stated by him the penalty order. The provision of section 273(2)(a) is attracted where an assessee furnishes estimate of advance tax payable by him which he knew or has reason to believe to be untrue. A thing which is in the knowledge or belief of an assessee, has to be proved by the assessee himself and not by the Revenue authorities. Thus, no benefit can be derived by the appellant from the aforesaid decision of the hon''ble Supreme Court in the case of Commissioner of Income Tax, Ahmedabad Vs. Sarabhai Holdings Pvt. Ltd., .

There cannot be any quarrel with the principles laid down by the Bombay High Court in the case of Hind Products Pvt. Ltd. Vs. Commissioner of Income Tax, Bombay City-1, and of the Calcutta High Court in the case of Commissioner of Income Tax Vs. Birla Cotton Spinning and Weaving Mills Ltd., wherein it has been held that the very word ''''estimate" implies presumptions and not accuracy and merely because at the end of the year an assessee is shown to have earned an income which is more than that shown in the estimate. That fact alone by itself will not indicate that the estimate was known to be untrue or the assessee has reason to believe that it was untrue. In the present case, we find that the claim of depreciation and investment allowance on machinery which the assessee had not even received and installed during the year in question, was clearly an after thought and based on procured documents, as found by all the authorities. The plea of excess excise liability was also not bona fide. Thus, the assessee was liable to pay the penalty u/s 273(2)(a) of the Act.

In view of the foregoing discussions, we are of the considered opinion that the finding of the income tax Appellate Tribunal that the assessee has not been able to specify the reasons as to why it considered the depreciation and investment allowance on the machinery which was yet to be installed for computing the income liable to pay advance tax, is neither perverse nor vitiated in law.

This leaves us to the third substantial question of law as to whether the income tax Appellate Tribunal ought to have recorded independent finding while confirming the order of the Commissioner of income tax (Appeals) on the merits of the matter. It is not in dispute that the Commissioner of income tax (Appeals) has given detailed findings on the merits of the matter. The Tribunal had dealt with the same in paragraph 17 of the order as follows:

We have considered the rival submissions and the facts and circumstances of the case on this point and are of the opinion that since the assessee has not refuted the specific finding of the Commissioner of income tax (Appeals) that the appellant has not been able to specify the reasons for filing the wrong estimate and also the fact the assessee has not been able to specify any reason as to why he considered the depreciation and investigation (sic) allowance on the machinery, which was yet to be installed, for computing its income liable to advance tax, we are in agreement with the findings of the Commissioner of income tax (Appeals) that the assessee had furnished a wrong estimate deliberately and consequently we uphold the order of the Commissioner of income tax (Appeals) on this point. The assessee''s this objection is also rejected. As far as case law are concerned, the same are distinguishable on facts and as a fresh case not applicable to the assessee''s present case.

From a perusal of the aforesaid paragraph, we find that the Tribunal had held that the assessee had not refuted the specific findings of the Commissioner of income tax (Appeals) that it had not been able to specify the reasons for filing the wrong estimate and also the fact that it had not been able to specify any reason as to why it considered the depreciation of investment allowance on the machinery which was yet to be installed, for computing its income liable to pay advance tax. Thereafter, the Tribunal recorded its agreement with the findings of the Commissioner of income tax (Appeals) and consequently upheld the order of the Commissioner of income tax (Appeals) on this point. It cannot be said that the Tribunal had not applied its mind to the matter of the merits and as the assessee had failed to refute the specific finding of the Commissioner of income tax (Appeals), the Tribunal had agreed with its finding.

In this view of the matter, we are of the considered opinion that the Tribunal was not required to give its independent finding when it had concurred with the findings of the Commissioner of income tax (Appeals). The various case law relied upon by the learned counsel for the parties, in the facts and circumstances of the case, are not applicable.

In view of the foregoing discussions, the substantial questions of law on which the present appeal has been admitted, are all answered in favour of the Revenue and against the assessee. The appeal fails and is dismissed.