K.M. Bhatia vs Commissioner of Income Tax

Abichandani, J.—The assessee-registered firm had originally filed return of income for the assessment year 1971-72 on 15-10-1971 declaring a total income of Rs. 1,01,917. Thereafter on 11-3-1974, the assessee filed a revised return declaring a total income of Rs. 1,58,917 the difference being identical item of Rs. 57,000 which was debited twice firstly by debiting the value of 14,250 tonnes of salt stated to have been washed away due to rain and again by showing less closing stock on account of reduction of 10 percent (14,250 tonnes) on account of rain-wash. The assessee was doing the activity of collecting, lifting and transporting of salt from Charkala Salt Works, on behalf of the Tata Chemicals, Mithapur. In its books of account, the assessee has while determining the gross profit debited a sum of Rs. 57,000 as value of 14,250 tonnes of salt at the rate of Rs. 4 per tone. During the said year, the opening stock of salt was 57,646 tonnes and the assessee had produced 91,132 tonnes making the total of 1,48,778 tonnes. Out of that figure, the assessee reduced 10 percent, that is, 14,250 tonnes. The assessee had actually transported 39,660 tonnes of salt to the Tata Chemicals, Mithapur. It had, thus, shown the closing stock at 94,868 tonnes which if deduction of 10 per cent due to rain-wash was not shown should have been 1,09,118 tons. The assessee had, thus, claimed adjustment of Rs. 57,000 not only by determining the closing stock but also as a separate item in the trading account. It appears that the ITO had written a letter dated 4-2-1974 to the assessee enquiring as to the basis on which 10 per cent adjustment for rain-wash was claimed and pointing out that the assessee had received an amount of Rs. 17,194 from the Tata Chemicals for rain-wash in the year and since that amount was allowed by the Tata Chemicals as rain-wash, the assessee should not have claimed the amount of Rs. 57,000. It appears that for the earlier assessment year 1970-71 in the appeal which was before the AAC though the excess rain-wash was not the subject-matter of the appeal, the counsel for the assessee brought to the notice of the AAC on 2-3-1974 that in that year also Rs. 32,764 were transferred from trading account to reserve account on account of rain-wash and that there was again a deduction made in the closing stock. Admittedly, the AAC had accepted the request on behalf of the assessee to add the amount in its income without issuing any enhancement notice or initiating any other proceedings against the assessee. For the year under consideration, that in 1971-72, the assessee filed revised return on 11-3-1974 adding the amount of Rs. 57,000 to its income and the ITO added Rs. 57,000 after getting the revised return on account of ''doubble deduction of rain-wash as per revised return'' and initiated penalty proceedings u/s 271(1)(c) of the income tax Act, 1961 (''the Act'') for double deduction of rain-wash and also similar proceedings for the other items of ''Matikam'' and ''Truck Bhada'' account. For the subsequent year 1972-73 also, the assessee had filed revised return and added back Rs. 53,572 which was debited to salt account twice in the original return. The IAC had in that case imposed a penalty of Rs. 55,000. For the said assessment year 1972-73, it was found by the Tribunal that the first return was for Rs. 1,54,485 while the income worked out to Rs. 1,92,473 and, thus, prima facie, Explanation to section 271(1)(c) was not attracted. The Tribunal found that since the Explanation to section 271(1)(c) was not considered by the IAC and so it could not be brought into picture before the Tribunal and, hence, the onus was on the revenue to establish that the assessee concealed the particulars of income or furnished inaccurate particulars. The Tribunal in terms found that the department had not done anything to show that the assessee''s case that the rain- wash allowance was claimed twice on account of the mistake on the part of the assessee was not correct. The Tribunal, therefore, deleted the penalty of Rs. 55,000 imposed for the assessment year 1972-73. For the year in question, that is 1971-72, in respect of the item of Rs. 57,000 the IAC as also the Tribunal heavily relied upon the letter dated 4-2-1974 written by the ITO to the assessee which suggested addition of Rs. 57,000 on different grounds as observed by the IAC and which though did not directly refer to the double claim of rain-wash brought out that the claim of the assessee for adjustment of Rs. 57,000 for rain-wash was not properly made, as observed by the Tribunal. The IAC had found that the revised return was prompted by the investigation which was started by the ITO regarding the rain-wash allowance. He found that the assessee had furnished inaccurate particulars of income even in the single claim of 10 per cent of reduction due to rain-wash as the actual loss due to rain wash was much less as reflected in the books of account of the Tata Chemicals. The IAC found that since the Explanation to section 271(1)(c) was attracted it was for the assessee to establish that the difference between the income finally determined and the income shown in the return submitted by the assessee after adjustments for expenses, etc., disallowed was not due to concealment of income. The IAC, therefore, imposed penalty of Rs. 1 lakh for the assessment year 1971-72. The Tribunal found that the assessee had filed return of income which was less than 80 per cent of the income assessed and hence Explanation to section 271(1)(c) was rightly attracted. The Tribunal held that though the ITO had allowed 10 per cent deduction due to rain-wash the matter was open for enquiry before the ITO and the subsequent conduct of the assessee of filing the revised return did not take it out of the mischief of section 271(1)(c) . The Tribunal observed that except stating that there was a mistake committed by the accountant nothing was shown by the assessee to that end and that it was difficult to believe that such substantial under-statement of income would go unnoticed by a businessman. The Tribunal while holding that the assessee had not discharged the onus under the Explanation to section 271(1)(c) observed that the penalty was attracted in respect of the double deduction for rain-wash which had not been allowed. The Tribunal, however, reduced the penalty of Rs. 1 lakh to Rs. 60,000 for the said assessment year 1971-72. In the aforesaid background, the Tribunal has referred to us the following questions u/s 256(2) of the Act:

Whether on the finding of the Tribunal that filing of the revised return adding thereto Rs. 57,000 on account of double deduction claimed for rain- wash was not voluntary, is against clear evidence on record and is not arrived at by considering the relevant facts and ignoring the relevant material on record and is reasonable ?

Whether the Tribunal is correct in law in confirming the penalty to the extent of Rs. 60,000 for assessment year 1971-72 the year under reference especially when similar penalty imposed for assessment year 1972-73 was cancelled?

It was contended on behalf of the assessee by the learned counsel Mr. K.C. Patel that there was apparent incongruity in the decision of the Tribunal in not accepting the Explanation given by the assessee for the year 1971-72 while the same Explanation of mistake having been committed by the accountant was not doubted in deciding the matter for the assessment year 1972-73. He submitted that even for the earlier year, that is, 1970-71 the assessee had at the appellate stage requested the IAC to add the amount of Rs. 32,764 for that year even though the deduction due to rain -wash was not an issue involved in that appeal. He submitted that the conduct of the assessee in requesting the AAC in appeal to add the said amount was bona fide and voluntary and since similar mistake was committed in respect of the subsequent years the assessee had hastened to file revised returns for those years. He submitted that the Tribunal did not take in to account such bona fide conduct of the assessee and simply relied upon the letter dated 4-2-1974 even though that letter did not refer to the item of the aspect of double deduction. He submitted that in the books of account, in the trading account the entry was shown while the other deduction was reflected in the statement of accounts which was due to the mistake of the accountant as pointed out in the letter dated 28-2-1974 of the assessee''s Chartered Accountant. Mr. Patel also argued that though the ITO has stated that by putting in double claim for rain wash the assessee was guilty of furnishing inaccurate particulars pf its income while initiating proceedings u/s 271(1)(c) further, the IAC had laid emphasis on the assessee having claimed 10 per cent for rain wash on the ground that such claim did not tally with the actual figures in the accounts of Tata Chemicals ignoring the fact that the ITO had ultimately allowed the 10 per cent for the rain wash. Mr. Patel submitted that this aspect was completely ignored by the Tribunal. He also argued that though Explanation was specifically referred to in respect of the other two items for which notice u/s 271(1)(c) was issued in the same order, the ITO did not refer to the Explanation in respect of the item in issue thereby leading the assessee into a belief that its Explanation would stand accepted unless controverted in which case it ought to have been brought to his notice so that it could have led further evidence in the matter.

The learned counsel Mr. B.J. Shelat, appearing for the revenue on the other hand contended, that in the instant case, the Explanation to section 271(1)(c) was squarely attracted and except for the bare assertion of the assessee that it was due to accountant''s mistake that the double claim came to be made, the assessee had not adduced any evidence in its support. He contended that the finding of the Tribunal that the revised return was not voluntarily filed and that it was difficult to believe the case of the assessee that there was a mistake on the part of the accountant, was a finding of fact and that, therefore, this Court should not interfere with these findings. He submitted that the assessee had not discharged onus of proof cast on it under Explanation to section 271(1)(c) and, therefore, the penalty was rightly levied.

Admittedly, the assessee had filed revised returns on 19-3-1974 in respect of the assessment year 1971-72 u/s 139(5) of the Act which, as applicable in the relevant year read as under :

Return of income.- (1) to (4) ******

(5) If any person having furnished a return under sub-section (1) or subsection (2) discovers any omission or any wrong statement therein, he may furnish a revised return at any time before the assessment is made."

On the plain reading of the provisions of sub-section (5) of section 139, it is clear that after having furnished the return if the assessee finds out any omission or a wrong statement in his return or such wrong statement comes to his knowledge for the first time after the filing of the return, he may furnish a revised return at any time before the assessment is made. Therefore, deliberate omissions and false and fraudulent statements fall outside the purview of sub-section (5) of section 139. This is why it has been consistently held by the Courts that, mere filing of revised returns will not absolve a person from penal liability u/s 271(1)(c) and it has not been disputed before us that the original return can be made the basis for the applicability of section 271(1)(c) as also its Explanation which for the relevant year read as under :

Failure to furnish returns, comply with notices, concealment of income, etc. - (1) If the income tax Officer or the Appellate Assistant Commissioner in the course of any proceedings under this Act, is satisfied that any person-

(a) and (b) ******

(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-

******

Explanation : Where the total income returned by any person is less than eighty per cent of the total income (hereinafter in this Explanation referred to as the correct income) as assessed u/s 143 or section 144 or section 147 (reduced by the expenditure incurred bona fide by him for the purpose of making or earning any income included in the total income but which has been disallowed as a deduction) , such person shall, unless he proves that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income for the purposes of clause (c) of this sub-section.

It will be seen that the proceeding u/s 271(1)(c) can be initiated if the ITO or the AAC is satisfied that any person has concealed the particulars of income or furnished inaccurate particulars of income. As can be seen from the order of the ITO he had initiated proceedings under the said provision on the ground that the assessee was guilty of furnishing inaccurate particulars of income and not on the ground that there was concealment of income. Admittedly, the ITO had ultimately accepted the claim of the assessee in respect of the 10 per cent deduction due to rain wash though earlier in his letter dated 4-2-1974 the ITO had questioned the assessee as to the basis on which he was claiming 10 per cent deduction on account of rain wash. In this context, we may refer to the decision of this High Court in Commissioner of Income Tax, Gujarat I Vs. Lakhdhir Lalji, in which it was held that where the penalty proceedings were commenced against the assessee on the footing of concealment of particulars of income but the final conclusion was based on a different footing, namely, of furnishing in accurate particulars it could not be said that the assessee was given a reasonable opportunity of being heard before imposing the order of penalty. It was held that the very basis of the penalty proceedings against the assessee initiated by the ITO disappeared in such case. The High Court upheld the conclusion of the Tribunal that the IAC had no jurisdiction to impose a penalty u/s 271(1)(c) for concealment of income. In the instant case, the Tribunal appears to have overlooked the fact that the IAC had based his reasoning on the footing that the actual loss due to rain wash was less than 10 per cent as was claimed by the assessee. The Tribunal did not notice that the IAC was oblivious of the fact that the ITO had ultimately upheld the claim of the assessee for 10 per cent deduction due to rain wash. The Tribunal also did not notice that the approach of the IAC that it was for the assessee to establish that there was no concealment of income was not warranted because of the ground which was mentioned by the ITO while initiating the proceedings which was that the assessee was guilty of furnishing inaccurate particulars and not that he was guilty of concealment of income. The Tribunal, therefore, in our opinion, erred in upholding the order of the IAC which proceeded on the reasoning not warranted by the settled position as reflected in CIT v. Lakhdhir Lalji''s case (supra) . The Explanation to section 271(1)(c) came to be considered by this Court in Additional Commissioner of Income Tax Vs. Chandravilas Hotel, and after reviewing the decisions of other High Courts, this Court observed that it was clear that the explanation created a legal fiction of the condition of its applicability was satisfied. As observed by this Court in its earlier decision in Commissioner of Income Tax, Gujarat I Vs. S.P. Bhatt, , since the condition contemplated was merely a matter of arithmetical calculation, the income tax authority was required to take the total income returned by the assessee and the total income as assessed by the revenue and if the former was less than 80 per cent of the latter the condition of applicability of the explanation was satisfied and in such case the assessee was deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof within the meaning of section 271(1)(c) . The explanation raised a legal fiction and the assessee was brought straightway within the ambit of the said provision. This legal fiction of explanation could, however, be displaced if the assessee proved that the failure to return the correct income, that is the total income assessed, did not arise out of any fraud or gross or wilful neglect on his part. In Commissioner of Income Tax Vs. Mussadilal Ram Bharose, ,theSupreme Court, while considering the provisions of section 271(1)(c) , observed that the burden cast upon the assessee was not discharged by any fantastic explanation nor was it the law that any and every explanation by the assessee must be accepted. It was held that the conclusion of the Tribunal on the relevant and sufficient material about the onus having been discharged by the assessee was a conclusion of fact. The Supreme Court held that the presumption arising under the explanation was a rule of evidence and was not conclusive but was rebuttable. In the instant case, since the original return which was filed by the assessee showed income less than 80 per cent of the income which was ultimately assessed by the revenue authority, the explanation was rightly held to have been attracted in its case and it was undoubtedly for the assessee to discharge the liability by showing that its failure to return the correct income did not arise from any fraud or any gross or wilful neglect on its part. The assessee can, by leading positive evidence, prove that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part or may prove it from the material which is already on record. If the material on record is sufficient and points to its innocence the burden cast on it by the explanation will stand discharged. The material on record would include the conduct of the assessee as reflecting from the record and all the relevant factors which may have bearing on the question whether he had conducted himself fraudulently or by any gross or wilful neglect. If the material on record made the explanation of the assessee plausible or if in other words, on the basis of preponderance of probabilities it was reasonably possible to accept the explanation then the burden will stand discharged. The said Explanation to section 271(1)(c) indicates a rule of evidence and the authority which imposes penalty is competent to invoke the explanation in reaching the final conclusion on the question of concealment. It therefore, follows that merely because the explanation has not been specifically referred to at the time when the proceedings were initiated, there would be no legal bar against invoking the explanation during the course of the proceedings. In the instant case, the original return showed income less than 80 per cent of the income ultimately assessed and, therefore, the explanation stood attracted and it cannot be said that because the ITO while initiating the proceedings did not specifically refer to the explanation, as he had done in respect of two other items while issuing the notice u/s 271(1)(c) , it cannot be invoked against the assessee. In other words, the ITO had no choice to invoke or not to invoke the explanation because it stood automatically attracted in view of the fact that the original return showed income less than 80 per cent of the income ultimately assessed.

The Tribunal as also the IAC have proceeded on the footing that the assessee got alerted in view of the letter dated 4-2-1974 written by the ITO and therefore the revised returns which were filed by it were not filed voluntarily. By the letter dated 4-2-1974, the ITO had called upon the assessee to state the basis for working out deduction due to rain wash at 10 per cent. It was also pointed out therein that the Tata Chemicals had allowed credit for rain wash to the tune of Rs. 17,194 for the said year and therefore the assessee need not claim any amount for the rain wash. For these reasons, the assessee was informed that the ITO intended to disallow the deduction due to rain wash of Rs. 57,000 and he invited the assessee to file its objections to the proposed action. We have carefully gone through the letter and we did not find any indication therein that the ITO had detected the deduction made once in the trading account and the other in the statement of accounts by the assessee. The assessee had filed its reply to this letter which was ultimately accepted and the claim of Rs. 57,000 was allowed. In other words, the basis of 10 per cent for claiming deduction was accepted by the ITO, It is, therefore, difficult to infer from this letter that the assessee got alerted as regards the double deduction claimed by it because of this letter. In fact, this letter indicated that the ITO was altogether on a different aspect of the matter and if the assessee wanted to do so, it could have still attempted to take the advantage of double deduction which was not at all discovered by the ITO. It, therefore, appears to us that the assessee had filed the revised return voluntarily. The conclusion arrived at by the Tribunal that the revised return filed by the assessee was a forced return due to the letter dated 4-2-1974, is a conclusion which cannot be reasonably arrived at in view of the contents of the said letter which in no way indicate that the ITO had the aspect of double deduction even remotely in his mind. The finding of the Tribunal is, therefore, not at all warranted by the evidence on record and is based on an erroneous inference from the said letter of the ITO.

There is one more important aspect of the matter which clearly shows that the Tribunal adopted an inconsistent and incongruous stand for upholding the penalty in respect of the year 1971-72. Admittedly, the assessee had for the year 1970- 71 voluntarily requested the AAC to add a sum of Rs. 32,000 to its income which was claimed due to the said mistake of double deduction even though there was no appeal as regards the item of the claim for rain wash. Admittedly, while adding that amount to the income the appellate authority did not find any case for issuing notice u/s 271(1)(c) for the year 1970-71. The Tribunal accepted the explanation of the assessee as regards the revised return filed for the year 1972-73 on the item of double deduction claimed for the washing away of salt due to rain. The Tribunal found that the department had not shown anything by which the explanation given by the assessee that the double claim had been made due to the mistake of the accountant would be doubted. Thus, though the same explanation which was given by the assessee, namely, mistake of the accounts clerk which it may be noticed was put forth at the earliest point of time in the letter dated 28-2-1974 written on behalf of the assessee to the ITO was accepted by the Tribunal for the year 1972-73 and had also found favour with the appellate authority for the year 1970-71 since it had not issued any notice u/s 271(1)(c) , an inconsistent approach has been adopted by the Tribunal in rejecting that explanation for the year 1971-72. If the explanation is accepted for the previous year and the subsequent year then there is no valid reason why it should have been rejected for the year 1971-72 merely on the ground that the burden of proof was on the assessee. If the explanation is true and acceptable for the preceding and the succeeding years it cannot be said that the same explanation is not true for the year 1971-72. We, therefore, find that the Tribunal had adopted an erroneous approach in rejecting the same explanation, namely, the mistake of the accountant for the year 1971-72 when it accepted the same for the subsequent year and when it had material on record to show that it must have been accepted for the earlier year 1970-71 by the AAC who added the amount of Rs. 32,000 at the instance of the assessee for the double claim due to rain wash and did not initiate any proceedings u/s 271(1)(c) . We therefore, hold that the Tribunal has committed an error in rejecting the explanation given by the assessee. The Tribunal has not taken into account the above relevant evidence and the conduct of the assessee and has reached findings which are not warranted by the evidence on record. The findings of the Tribunal are such that it cannot be reasonable arrived at on the basis of the evidence on record and the attendant circumstances. We, therefore, hold that the Tribunal committed an error in upholding the penalty imposed on the assessee.

For the above reasons, we answer question No. 1 in favour of the assessee and against the revenue as under.

The finding of the Tribunal that the filing of the revised return adding thereto Rs. 57,000 on account of double deduction claim for rain wash is not voluntary, is against the clear evidence on record, unreasonable and not arrived at by considering the relevant facts of the case and is given ignoring the relevant material on record.

Question No. 2 is answered in the negative and against the revenue. The reference stands disposed of, accordingly, with no order as to costs.