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Judgment
Balasubrahmanyan, J.—The assessee in this group of cases is a registered firm with three partners carrying on business in the manufacture
and sale of handloom piece-goods. For the assessment years 1953-54 to 1961-62, the Income Tax Officer assessed the firm''s income on the the
basis of revised returns furnished by the assessee. The revised returns were submitted by the assessee firm in the following circumstances. For
1962-63, the assessee filed a return of income on December 26, 1962. The Income Tax Officer, in the course of the proceedings for assessment
for wheat year, noticed credits appearing in the firm''s accounts in the names of certain multani bankers. Those multani bankers were reputed in the
Income Tax Department to have indulged in hawala transactions, that is to say, in aiding Income Tax assessees to post credit entries in their
accounts as though they had obtained loans on hundis and had repaid them while no money passed as loans, nor were any money returned as
repayment. Before, however, investigations could be concluded as to the genuineness and the nature and source of those credits, the assessee filed
a petition before the Commissioner of Income Tax purporting to be made u/s 27(4A) of the Income Tax Act, 1961. In that petition, it referred to
the credits appearing in their books in the names of multani financiers, the bulk of which arose in the account years relevant to 1956-67 to 1958-
The peak credit in the multani bankers'' accounts amounted to Rs. 6,00,000. The assessee submitted that the peak credit may be regarded as
the firm''s income. But since the entire income could not have accrued in a single year, it was suggested that the amount may be spread over six
years of assessment from 1958-59 attributing Rs. 50,000 (sic) in each of the assessment years as the income over and above what was returned
by the assessee-firm from out of its books of account. Having offered for assessment the peak credit as spread over in this manner in a number of
assessments, the assessee pleaded that in view of the voluntary disclosure made by them of the income represented by the hundi loans, any penalty
which might otherwise be exigible might be waived. A copy of the petition presented before the Commissioner of Income Tax was marked to the
assessing officer. The officer, however, completed the assessment for the assessment year 1962-63 without paying any regard to the assessee''s
disclosure petition. He made a similar assessment for the subsequent year 1963-64. These assessments were taken in appeal by the assessee to
the Appellate Assistant Commissioner. It was represented before the Appellate Assistant Commissioner that in view of their disclosure petition
which was being considered by the Commissioner of Income Tax, the assessments made without any regard for that disclosure petition should be
set aside. The Appellate Assistant Commissioner accepted this submission, set aside the assessment orders for 1962-63 and 1963-64 and
directed the Income Tax Officer to make fresh assessments in conformity with any order that the Commissioner may pass on the basis of the
disclosure petition filed by the assessee. Subsequently, the assessee filed a further petition before the Commissioner of Income Tax which
practically set out an agreed basis for making the assessments on the assessee having regard to the credits in the multani bankers'' hundi loan
accounts. On the basis of those proposals, the assessee also filed revised returns for the years 1953-54 to 1965-66. In that petition, it undertook
to pay the tax payable on these disclosed amounts thus at Rs. 1,00,000 at once and the balance in 24 equal monthly instalments commencing from
April, 1969. It also furnished a security for the due payment of any additional tax that might be levied as a result of the disclosure. To secure the
due payment of the tax, the assessee gave its immovable property in Angappa Naicken Street, Madras, as security under a security bond. Having
done so, it made a request to the Department that only a nominal penalty may be levied.
The Income Tax Officer accepted the offer of the assessee and also the scheme of spread-over of the amount of peak credits as between the
several years. The following table sets out for each of the relevant assessment years the amount offered by the assessee for the assessment years,
the amount offered by the assessee for assessment over and above the income already assessed and the actual additions made by the Income Tax
Officer on the basis of the assessee''s offer :
Assessment year Amount to be added
Rs.
1953-54 1,05,000
1954-55 83,000
1955-56 83,000
1956-57 76,564
1957-58 85,939
1958-59 1,12,318
1959-60 61,191
1960-61 1,00,571
1961-62 75,967
1962-63 80,763
1963-64 1,08,936
1964-65 1,05,827
1965-66 86,779
It will be seen from the above table that the Income Tax Officer accepted the last five offers made by way of voluntary disclosure of income
which are not earlier disclosed by them in their original returns and which were are not disclosed as income receipts in the books of account.
While the Income Tax Officer made the assessments in this manner following the voluntary disclosure, he nevertheless initiated penalty
proceeding against the assessee u/s 27(1)(c) of the Income Tax Act, 1961. These proceedings subsequently stood transferred to the Inspecting
Assistant Commissioner. When the assessee was asked to show cause against the levy of penalty, the assessee represented that these were not
cases in which action u/s 271(1)(c) could be launched. The assessee submitted that the assessment was made on the basis of the petition u/s
271(4A) of the Income Tax Act filed by the assessee before the Commissioner of Income Tax, even before any investigation was undertaken by
the Department. It was further represented that the figures offered by the assessee for the assessments have been accepted as correct. Besides, the
assessee also paid off all the tax demands and had furnished adequate security of immovable property for the taxes that might still have to be
raised. Above all, the assessee had co-operated with the Department for the expeditious completion of the assessments. In these circumstances,
the assessee submitted that there was no case for levy of penalties.
The Inspecting Assistant Commissioner, however, held that the penalties had to be levied on the assessee on the score that it had concealed
particulars of their income. The Inspecting Assistant Commissioner observed that since the assessee had offered the peak credit in the accounts as
taxable income, the assessee must be taken to have admitted that the credit entries were bogus and they represented the assessee''s concealed
income. The Inspecting Assistant Commissioner further held that the facts that the assessee had admitted the income character of the cash credits
while filing the returns and had also co-operated with the Department in getting the assessments concluded and also paid the taxes levied on the
basis of reassessments were all irrelevant factors in the proceedings u/s 271(1)(c) of the Act. In this view, he levied the following penalties u/s
271(1)(c) :
Assessment year Rs.
1953-54 15,666
1954-55 13,610
1955-56 14,892
1956-57 13,718
1957-58 15,852
1958-59 17,465
1959-60 9,274
1960-61 19,380
1961-62 12,748
1962-63 13,542
1963-64 18,670
1964-65 17,461
1965-66 7,750
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2,90,028
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On appeal, the Tribunal sustained the penalties for all the years although they did so for different reasons. For the first nine years 1953-54 to
1961-62, the penalty proceedings were started on the foot of reassessment proceedings made u/s 147. The Tribunal sustained the penalties for
those years on the score that the reassessments were all made on the vary basis of the assessee''s revised returns filed during the course of
reassessment proceedings which disclosed an income far higher than income returned by the assessee in the original assessment proceedings. As
for the next assessee come out with voluntary disclosure. This feature, according to the Tribunal, showed that the assessee had concealed its
income for this years. For the last three years, namely, 1963-64 to 1965-66, the Tribunal accepted the fact that the assessee had filed revised
returns even before the Income Tax Officer set on foot any inquiries or investigations. However, the revised returns even for those years, according
to the Tribunal, came about only because of the inquiries being conducted by the Income Tax Officer in the course of the assessment for 1962-63.
The Tribunal pointed out that in the voluntary disclosure petition, it was admitted that the crediting of of interest on hundi credits was also fictitious
and since the interest figured in the last three years of assessment, 1963-64 to 1965-66, the assessee must be treated as having concealed their
income. The Tribunal then proceeded to hold generally that the assessee cannot escape from the penalties merely because the additional
assessment adhered to the figures returned by the assessee in the revised returns.
In this group of references by the assessee, the very basis of the Tribunal''s decision is challenged from different angles such as legality of
penalty, burden of proof of concealment of income, reasonableness of inference of concealment and non-detection of concealment by the
Department before the filing of the revised returns. Contentions based on s. 271(4A) were earlier addressed by the assessee before the Inspecting
Assistant Commissioner in the course of the penalty proceedings. Section 271(4A) came into the discussion because the assessee had filed a
voluntary disclosure of income before the Commissioner and had invoked the Commissioner''s power u/s 271(4A) of the Act. This provision
empowers empowers the Commissioner to waive altogether or at least reduce the penalty impossible on the assessee even for concealment of
income, if certain conditions are fulfilled, namely, (i) if the assessee voluntarily and in good faith has made a full disclosure of his income before an
investigation is set on foot by the Income Tax Officer in the concerned assessment or before the Income Tax Officer actually detects any
concealment on the part of the assessee; (ii) the assessee has co-operated in the inquiry into the assessment of income; and (iii) that the assessee
has either paid or made satisfactory arrangements for payment of the tax payable on the basis of his voluntary disclosure. Before the Inspecting
Assistant Commissioner, the assessee urged that they had fulfilled all those conditions and, therefore, no penalty should be levied. As earlier
indicated, the Inspecting Assistant Commissioner, however, considered that those contentions have properly to be urged in a different forum,
namely, before the Commissioner, and in different proceedings, namely, u/s 271(4A).
We agree with the Inspecting Assistant Commissioner to one extent that the two proceedings, one u/s 271(1)(c) and the other u/s 271(4A), are
different proceedings. The question, however, is whether the grounds for penalty stated by the Inspecting Assistant Commissioner and approved
by the Tribunal are good in law.
We think we may address ourselves to this question by adopting the manner of the Tribunal and examining the several assessments involved in
these references as falling under well-defined groups. The penalties falling under the first group relate to nine assessment years from 1953-54 to
1961-62. The levy for this group of assessment years was made in the course of the reassessment proceedings. The record shows that on the very
day the assessee filed the returns in the course of reassessment proceedings the assessments were completed, adopting, without any material
change, the figures offered for assessment by the assessee. The pattern of these reassessments shows that in the course of reassessment
proceedings, at any rate, there was no concealment by the assessee. However, both the Inspecting Assistant Commissioner and the Tribunal only
laid stress on the undeniable fact that there was a blatant concealment of income on the part of the assessee in the original assessments for the
years 1953-54 to 1961-62. The question is whether for such concealment, penalties can be levied on the assessee in the reassessment proceeding.
According to the legal position laid down by the Supreme Court in a recent decision, a reassessment under the taxing enactments completely
obliterates without a trace the original assessment proceedings, vide The Deputy Commissioner of Commercial Taxes Vs. H.R. Sri Ramulu, . It
was observed that once reassessment was started, the initial order of assessment creases to be operative. It was further observe that the effect of
reopening the assessment was to vacate or set aside the initial order of assessment and to substitute in its place the order made on reassessment.
According to the Supreme Court, the initial order for assessment in such a case cannot be said to survive even partially. This decision of the
Supreme Court was rendered in a sales tax case.
In a decision dealing with reassessment for Income Tax in V. Jaganmohan Rao and Others Vs. Commissioner of Income Tax and Excess
Profits Tax, Andhra Pradesh, , the Supreme Court went further and observed that once an assessment is reopened by the issue of a notice of
reassessment, the previous under assessment is set aside and the whole assessment proceedings start afresh.
Although the two decisions of the Supreme Court cited above lay down the legal position on the question whether the original assessment
survives the moment reassessment proceedings are started, there is no reported decision by any court to the effect that on reassessment being
made, no penalty can be levied on the basis of the assessee''s concealment in the original assessment proceedings. On the contrary, there is a
decision of the Supreme Court in N.A. Malbari and Bros. Vs. Commissioner of Income Tax, Bombay, , in which it was held that for a
concealment in the original assessment proceedings, the assessee may be rendered liable for penalty in the course of the reassessment proceedings.
That was a case where an assessee did not report his income from a foreign branch in the course of original assessment proceedings but on the
assessment being reopened, he disclosed the entire branch income with correct and complete particulars. The reassessment was based solely on
the basis of the figures furnished by the assessee. There was also no other default on his part in the reassessment proceedings. Nevertheless,
penalty was levied on the assessee on the score that he concealed the branch income in the course of the original assessment proceedings. This
penalty was upheld by the Supreme Court.
We do not find any discussion in this case about the effect of a reassessment on the original assessment proceedings. Nor has the court
discussed the position whether concealment of income by the assessee in the course of the original proceedings would survive when the original
assessment itself is supplanted by the reassessment. It, however, seems to us that even on the basis of the position that reassessment proceedings
arose out of existence of the original assessment proceedings, the assessee can by no means be regarded as not having concealed his income,
merely because in the reassessment proceedings he has made a clean breast of the whole income and expenditure position. The very reason for
reassessment proceedings especially u/s 147(a) of the Income Tax Act is that income has escaped assessment by reason of the failure or omission
on the part of the assessee to fully and truly disclose all material facts necessary for his assessment. when such is the basis for reassessment, it
would be quite odd to hold that the assessee is not guilty of concealment of income, merely because in the reassessment proceedings he
unconceals what he has concealed in the original assessment. We are, therefore, satisfied that the assessee in the present case was properly
charged with penalty in the reassessments for 1953-54 to 1961-62 notwithstanding the fact that it was the assessee''s own voluntary disclosure
which brought about the reassessments and despite the circumstance that not a pie more was added that what was disclosed by the assessee in the
reassessment proceedings. We must, therefore, uphold the penalties for these years.
This leaves us with the penalties for the subsequent assessment years 1962-63 to 1965-66. Amongst those assessments, those for 1962-63
and 1963-64 from a distinct group and may be dealt with as such. For these two assessment years, the assessee filed returns of income which the
Income Tax Officer found to be incorrect and incomplete. While completing the assessments, therefore, the Income Tax Officer issued penalty
notices u/s 271(1)(c) on the score that the assessee had concealed particulars of his income. The assessee appealed against those assessments.
During the tendency of those appeals before the Appellate Assistant Commissioner, the assessee and the Department arrived at a settlement on the
basis of the assessee''s voluntary disclosure. To give effect to the settlement, the Appellate Assistant Commissioner set aside these two
assessments and directed the officer to redo the assessments and implement the terms of the of the settlement. In the events that happened, the
question is whether in the assessments made by the officer after remand by the Appellate Assistant Commissioner, there was any scope for the
levy of penalty solely for the reason that in the original assessment proceedings, the assessee had not truly or completely disclosed his entire
income. It seems to us that the position is a fortiori. The Appellate Assistant Commissioner, while disposing of an appeal, has the power to set
aside an assessment and direct the officer to redo the assessment, vide section 256(1)(a) of the Act. It seems to us that what can be set aside in
exercise of this power is an order of assessment made by the officer. The Appellate Assistant Commissioner cannot set aside a return made by the
assessee or completely rub off from the record the conduct of the assessee on concealing the particulars of his income in the assessment
proceeding. The position seems to us to be similar to the concealment of income in the course of the original assessment proceedings. As
contrasted with reassessment proceedings, that concealment would lend to survive even the reopening of the assessment and the subsequent
retiring of a reassessment. By analogy of deduction from N.A. Malbari and Bros. Vs. Commissioner of Income Tax, Bombay, , we must hold that
the assessee cannot be absolved from having concealed his income in the course of the original assessment proceedings, merely because the
original assessments were set aside on appeal by the Appellate Assistant Commissioner. The penalties for the two years 1962-63 and 1963-64
must also be upheld.
This leaves us only with the last two assessment years under reference. namely, 1964-65 and 1965-66. The assessee filed original returns for
these two years, but subsequently, even before the officer took up the returns for inquiry, the assessee filed revised revised returns reporting higher
figures of income, adopting the voluntary disclosure settlement between him and the Department. In other words, even before the Income Tax
Officer set on foot any investigation and even before he detected any concealment of income in these two years, the assessee came out with
revised returns on the basis of his voluntary disclosure. What is more, the assessments which were completed by the Income Tax Officer were
based out and out on the figures offered by the assessee on the basis of the voluntary disclosure in the revised returns. Nevertheless, the inspecting
Assistant Commissioner of Income Tax held that even for those two years, the assessee was liable for penalty.
In our view, section 271(1)(c) could not be invoked against the assessee for these two years, namely 1964-65 and 1965-66. It is true that the
original returns filed by the assessee understated the income. But before the ink on the returns were dry, as it were, the assessee came out with the
full disclosure on the basis of which the assessments had been completed. In these circumstances, we fail to see how any concealment of income
can be attributed to the assessee. In a recent unreported judgment rendered by this court in Tax Case No. 466 of 1977 M. Radhakrishniah Vs.
Commissioner of Income Tax, Madras, , it was held that penalty u/s 271(1)(c) cannot be levied merely by spelling out the concealment from the
original return of income. This court held that for a finding as to concealment, the whole gamut of the assessment proceedings will have to be taken
note of and not merely the initial return filed by the assessee. It was pointed out in that case that although the original return furnished by the
assessee contained omissions, yet those omissions were made good voluntarily and before any investigation was set on foot by the assessing
officer. In the event, it was held that it cannot be said that there was any concealment in the course of the assessment proceedings. This unreported
decision covers the present case in regard to the penalties for the last two assessment years.
Learned counsel for the Revenue cited, in support of the levy of penalty for the last two years, Commissioner of Income Tax Vs. J.K.A.
Subramania Chettiar, . In the unreported judgment to which we have made reference earlier, it was observed that Commissioner of Income Tax
Vs. J.K.A. Subramania Chettiar, cannot be regarded as a complete tract on the construction of section 271(1)(c) of the Act, but that it turned
purely on the answer to the two minor legal contentions. We do not accordingly feel incommoded, in the slightest degree, by Commissioner of
Income Tax Vs. J.K.A. Subramania Chettiar, , in following the unreported judgment and holding that the levy of penalties for the last two years is
illegal.
Learned counsel for the Revenue referred to another judgment of a Bench of this court in Commissioner of Income Tax Vs. Krishna and Co., ,
which was also a case of penalty u/s 271(1)(c) of the Act. It was somewhat broadly stated in that case that where the assessee himself made an
admission about having earned income which was not shown by him in the original return, that by itself would be sufficient to justify a penalty for
concealment. It must, however, be pointed out that in that case, the admission or confession by the assessee as to his having earned a larger
income that he reported originally came about only after an inquiry was set on foot by the Income Tax Officer and after the Income Tax Officer
was about to detect the concealment. In the present case, however, the fact is quite different. As we pointed out earlier, even before the Income
Tax Officer took up for scrutiny the assessee''s returns for these two years, the assessee had filed a voluntary disclosure and on that basis had
offered income over and above that which he furnished in the original return. We do not, therefore, see any parallel between the present case and
the case in Commissioner of Income Tax Vs. Krishna and Co., .
The first question of law propounded for our consideration in this group is as follows :
Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that section 271(1)(c) is attracted and the levy
of penalty of Rs. 15,666; Rs. 13,610; Rs. 14,892; Rs. 13,718; Rs. 15,852; Rs. 17,465; Rs. 9,274; Rs. 19,380; Rs. 12,748; Rs. 13,542; Rs.
18,760; Rs. 17,461; Rs. 7,750 is lawful for the assessment years 1953-54; 1954-55; 1955-56; 1956-57; 1957-58; 1958-59; 1959-60; 1960-
61; 1961-62; 1962-63; 1963-64, 1964-65 and 1965-66, respectively ?
We may sum up our answer to the above question of law in the following terms : The penalties for the first nine assessment years, namely,
1953-54 to 1961-62, must be held to have been levied in accordance with law. The penalties for the last two assessment years 1964-65 and
1965-66, however, must be held to have been wrongfully levied, since there was no basis for the finding as to concealment.
In the light of our answer to the first question, we do not think the other question of law propounded by the Tribunal arise at all for
consideration . Those questions are not independent question in themselves, but they only highlight the different facets of the question of law which
we have already disposed of. We desist from entering any formal answers to the rest of the questions of law.
Having regard to the results of these references, we do not make any order as to casts.