Kikani Gordhandas and Co. vs Commissioner of Income Tax

G.T. Nanavati, J.—The following question has been referred to this court for its opinion by the Income Tax Appellate Tribunal, Ahmedabad Bench, u/s 265(1) of the Income Tax Act, 1961 :

"Whether, on the facts and in the circumstances of the case, and in view of the different provisions of the law, the Appellate Tribunal was justified in upholding the imposition of penalty of Rs. 21,865 levied u/s 271(1)(c) of the Income Tax Act, 1961 ?"

The assessee is a registered firm doing business in cotton and cotton seeds. During the relevant accounting year, i.e., Samvat year 2023, (November 13, 1966, to November 2, 1967), the assessee paid a sum of Rs. 21,685 to its employee R. P. Shah as profit earned by him from transactions in cotton done by the assessee on his behalf. This amount of Rs. 21,685 was claimed as a deduction from the total income of the assessee.

The Income Tax Officer disallow that claim and treated the said amount as income of the assessee and levied tax Officer also passed an order or issuing notice u/s 274.

Against the assessment order, the assessee preferred an appeal to the Appellate Assistant Commissioner but the same was dismissed so far as claim or deduction of Rs. 21,685 was concerned.

The assessee then preferred an appeal against that order to the Income Tax Appellate Tribunal challenging the disallowance of Rs. 21,685. The Tribunal, after considering the fact that R. P. Shah did not have any licence to deal in cotton, that no separate account was maintained in the name of R. P. Shah to the assessee, held that purchase made with that amount were made by the assessee for its own business and not or business of R. P. Shah.

As the Income Tax Officer had passed the order for issuing notice u/s 274, a show cause notice came to be issued on February, 16, 1972. The assessee filed its reply on April 14, 1972, and a further reply on September 19, 1973. The Inspecting Assistant Commissioner rejected the contention that the penalty proceedings were not validly initiated and on merits, held that the plea of the assessee that the transaction in question was that of R. P. Shah cannot be accepted. As regards the contention that R. P. Shah had shown the income from that business in his personal Income Tax return, the Inspecting Assistant Commissioner held that the circumstances that R. P. Shah did not pay any tax was strongly suggestive of the fact that the return was filed by him only to help the assessee. Against this order passed by the Inspecting Assistant Commissioner, the assessee filed an appeal to the Tribunal. Before the Tribunal, it was contended on behalf of the assessee that the claim for deduction of Rs. 21,685 was disallowed only because it could not be established that it was the assessee''s income but that would not justify imposing a penalty without any material to show that the assessee intended to conceal the said income with a view to avoid payment of tax. It was also submitted that the Inspecting Assistant Commissioner committed an error of law in holding that in proceedings u/s 271(1)(c), means era is not required to be established. The Tribunal accepted the contention raised on behalf of the assessee that means rea was required to be established, but refused to set aside the order of the Inspecting Assistant Commissioner only, on that ground. The Tribunal further held that the assessee had made a false claim for deduction of Rs. 21,685 and that clearly established the mala fides of the assessee moved the Tribunal for referring the abovestated question to this court.

What is submitted by learned counsel for the assessee is that the reason given by the Tribunal for holding that the claim made by the assessee in respect of Rs. 21,685 was a false claim are not proper and sufficient for the purpose of holding that the claim made by the assessee was a false claim and that it amounted to concealment as contemplated by section 271(1)(c) of the Act.

In our opinion, there is considerable substance in the contentions raised on behalf of the assessee. In order to hold that the claim made by the assessee was a false claim, the Tribunal has merely relied upon the order and the reasons given in the order passed by the Inspecting Assistant Commissioner. The same are as under :

(1) R. P. Shah did not have a licence to deal in cotton.

(2) No separate account of R. P. Shah was kept in the assessee''s books.

(3) R. P. Shah did not pay ginning charges to the assessee which charges would have been paid by R. P. Shah if the transaction was genuine.

(4) The purchase prices were entered in its own books of account by the assessee, without making any suitable adjustment entries in R. P. Shah''s account.

(5) R. P. Shah had not paid the tax even though he had filed a return of his income showing this amount of Rs. 21,685.

As R. P. Shah did not have any licence to deal in cotton, obviously, the assessee could not have made the corresponding entries in its books of account which would have put the assessee in a difficult situation and that would have provided sufficient material or prosecuting the assessee for abetting R. P. Shah in the business of dealing in cotton without a licence. Therefore, the absence of entries should not have weighed with the Tribunal in holding that the explanation given by the assessee was a false explanation. The explanation given by the assessee was quite consistent with the act that R. P. Shah did not have any licence and, therefore, no corresponding entries were made in his own account book in the separate account of R. P. Shah did not have any licence and, therefore, no corresponding entries were made in his account book in the separate account of R. P. Shah. The assessee had also produced three documents in order to show that ginning charges, interest, etc., were paid by R. P. Shah to the assessee. The Tribunal did not think it fit to place any reliance upon the said documents. In our opinion, the Tribunal cannot be said to have committed an error in not relying upon these documents. But, even in the absence of these documents, it cannot be said that the explanation which was given by the assessee, was false. Another circumstance which has been relied upon by the department in support of its contention is that even though R. P. Shah had filed his return of income, he had not paid tax. In this connection, what is required to be noted is that though the file pertaining to R. P. Shah was shown to the Tribunal, the Department had not produced any material to show that any tax was payable and yet it was not paid by R. P. Shah. Even if it is assumed that some tax was payable by R. P. Shah, non-payment of tax by him cannot lead to an inference that he had filed the return only with a view to accommodate the assessee.

One more circumstance which has not been given due weight by the Tribunal is that R. P. Shah did disclose this income in his return of income and Income Tax Officer accepted the return. Thus, an amount of Rs. 21,685 was accepted as income of R. P. Shah by the Income Tax Officer who had assessed the assessee. It appears that R. P. Shah had filed the return in time and he was assessed either at the same time when the assessee was assessed or at some time before that. That becomes clear from the fact that in the reply to the show cause notice issued u/s 271 on February 16, 1972, the assessee had come out with the defence that R. P. Shah had filed his return and paid tax on the said income. In the second reply filed by the assessee on September 19, 1973, the account number of R. P. Shah was also disclosed and it was also disclosed, before which the Income Tax Officer, the return was filed. It is now an admitted the position that the assessment of R. P. Shah in respect of that income was not protective assessment. We were told at the Bar by learned counsel or the assessee that the account of R. P. Shah was squared of in Samvat year 2024 that is in the next year, and he submitted that this indicative of the fact that the said transaction was a genuine transaction and it was really the transaction of R. P. Shah. That also lends support to the view which we are about to take that the said transaction was really that of R. P. Shah and not that of the assessee. In our view, in view of the material on record, the entries made in the books of the assessee, acceptance of the return of R. P. Shah which disclosed the said amount of Rs. 21,685 as his income and the circumstance that in the very next year, this amount was in act paid to R. P. Shah, it cannot be said that the assessee had concealed the said income. As we are taking this view, it is not necessary to consider the question whether establishment of mens rea was necessary before passing the order of penalty.

For the reasons stated above, we answer the question referred to us in the negative, that is in favour of the assessee and against the Revenue. No order as to costs.