S. Subramania Chetty vs Commissioner of Income Tax

Ismail, J.—Pursuant to the directions of this court dated 30th March, 1970, the Income Tax Appellate Tribunal, Madras Bench, has

referred the following questions of law for the opinion of this court:

Whether, on the facts and in the circumstances of the case, the addition of Rs. 47,770 as representing the income of the assessee from

undisclosed sources is justified in law ?

Whether, on the facts and in the circumstances of the case, the levy of penalty of Rs. 3,000 against the assessee for the assessment year 1960-

61, u/s 221(1) of the Income Tax Act, is justified in law ?

Whether, on the facts and in the circumstances of the case, the levy of penalty of Rs. 11,200 against the assessee for the assessment year 1960-

61, u/s 271(1)(c) of the Income Tax Act, 1961, is valid and justified in law ?

The facts are simple. The assessee carries on business in oil seeds. For the year ending March 31, 1960, relevant to the assessment year 1960-

61, the assessee filed a return disclosing an income of Rs. 6,154. The assessment was completed accepting the income returned by the assessee.

Bat later the Income Tax Officer found that the assessee had made certain purchases from Messrs. Narothmal and Company and Messrs. P.

Vasanthalal and Company, to the extent of Rs. 14,515 and Rs. 33,255, respectively, and that though they had been recorded in the books of the

assessee as credit purchases, they had been actually purchased by payment of cash through banks. In view of this, he reopened the assessment

proceedings u/s 147(b) of the Income Tax Act. After issuing a notice u/s 148 of the Act to the assessee, the Income Tax Officer directed the

assessee to explain the sources for cash payment to the bank and to offer explanation as to why the purchases had been shown as credit

purchases, while actually they had been paid for in cash. In spite of repeated opportunities given to him the assessee did not produce any evidence

for the purchases and the Income Tax Officer, who had obtained the dates of the purchases from Messrs. Vasanthalal and Company and Messrs.

Narothmal and Company, came to the conclusion that the assessee himself paid for those purchases from his income from undisclosed sources.

Consequently, he added a sum of Rs. 47,770 being the total of these two amounts as income of the assessee from undisclosed sources in the

relevant year.

The assessee filed an appeal before the Appellate Assistant Commissioner and for the first time contended before the Appellate Assistant

Commissioner that he had borrowed from four persons in Pondicherry for financing the purchases referred to above and also filed before the

Appellate Assistant Commissioner affidavits by the said four persons to the effect that they had advanced monies to the assessee. The Appellate

Assistant Commissioner wanted to give an opportunity to the assessee to prove this new case put forward by him and, therefore, called for a

report from the Income Tax Officer regarding the credit-worthiness of the said four persons, whom the assessee could produce before the Income

Tax Officer and whom the officer could cross-examine. The Appellate Assistant Commissioner also stated that it was open to the Income Tax

Officer to forward such other materials as he could gather with regard to the credit-worthiness of the said four persons. The Income Tax Officer,

after giving an opportunity to the asses-see to produce the said four persons and after recording their evidence, submitted a report to the Appellate

Assistant Commissioner. The Appellate Assistant Commissioner, who considered the report of the Income Tax Officer, on an appreciation of the

evidence, came to the conclusion that the new case put forward by the assessee as to the loans having been taken from four persons in

Pondicherry was an after-thought and that the evidence was insufficient to prove that monies had been borrowed by the assessee from the said

four persons, with the result he confirmed the addition of Rs. 47,770 as income from undisclosed sources made by the Income Tax Officer.

The assessee preferred a further appeal to the Income Tax Appellate Tribunal and the Income Tax Appellate Tribunal confirmed the conclusion

of the Appellate Assistant Commissioner holding that the evidence produced by the assessee was not acceptable to establish his case that he had

borrowed the said sum from the four persons in Pondicherry. Along with this appeal, the Tribunal had disposed of four other appeals also, of

which one appeal related to the levy of penalty of a sum of Rs. 11,200 u/s 271(1)(c) of the Income Tax Act, 1961, on the ground that the

assessee had concealed the said income of Rs. 47,770. The three other appeals related to levy of penalty u/s 221(1) of the Income Tax Act,

1961, in respect of the defaults committed by the assessee in paying the tax itself. The Income Tax Appellate Tribunal upheld the levy of penalty

u/s 271(1)(c) of the Income Tax Act, 1961. With regard to the levy of penalty u/s 221(1) of the Income Tax Act, 1961, the penalty was originally

levied in a sum of Rs. 500 on 16th January, 1965, and subsequently a penalty of Rs. 1,500 was levied on March 11, 1965, and finally a penalty of

Rs. 3,000 was levied on March 25, 1965. The Tribunal took the view that in respect of the same tax, within a period of three months, these three

different penalties had been levied and that it would be very harsh on the assessee and, therefore, it set aside the penalty of Rs. 500 levied on

January 16, 1965, and the penalty of Rs. 1,500-tevied on March 11, 1965, and the penalty of Rs. 3,000 levied on March 25, 1965. In respect of

these orders of the Tribunal only the three questions extracted above were referred to this court for its opinion.

As far as the first question is concerned, we are clearly of the opinion that the Tribunal cannot be said to have committed any error of law. As

we pointed out already, admittedly in the books of accounts of the asses-see, it was shown as if the assessee had purchased oil seeds from the two

merchants in question on credit. However, on enquiry, the Income Tax Officer found that the purchases were made against cash payment and

were not made on credit. The assessee must be deemed to have accepted this fact because it is only on this basis that he could produce the four

persons from Pondicherry, to show that they had advanced monies to him with which he financed the transactions in question. The four persons

were examined before the Income Tax Officer and they had stated that they had advanced monies to the assessee. But the Appellate Assistant

Commissioner as well as the Tribunal declined to place any reliance on the evidence of these four persons and they have given reasons for not

placing any such reliance. In view of the fact that the acceptance or non-acceptance of the evidence of those four persons was a matter entirely

within the jurisdiction of the Appellate Assistant Commissioner and the Tribunal, it cannot be said that the Tribunal committed any error of law in

not accepting and acting on the evidence of those persons. The finding of the Tribunal that the assessee had not established that he had borrowed

the monies in question from the said four persons in Pondicherry is a finding primarily on a question of fact and the Tribunal cannot be said to have

committed any error in so finding.

Realising this position only, Mr. K. Srinivasan, learned counsel for the assessee, drew our attention to the order of the Appellate Assistant

Commissioner dated 17th March, 1965, by which he called for a report from the Income Tax Officer. As we pointed out already, before the

Appellate Assistant Commissioner, affidavits from the four persons had been filed and, with reference to this, the Appellate Assistant

Commissioner recorded:

I find from the records that this aspect has not been looked into by the Income Tax Officer. He is, therefore, directed to enquire into the credit-

worthiness of these parties who would be produced before him by the appellant (assessee) and submit his report after cross-examining them. He

may also collect further materials which might be necessary to decide on the credit-worthiness of these parties.

The contention of the learned counsel for the assessee is that the Appellate Assistant Commissioner directed the Income Tax Officer to enquire

into the credit-worthiness of the four persons thereby indicating that the Appellate Assistant Commissioner accepted the fact that the said four

persons had advanced monies to the assessee and that, therefore, it was not open to him at a later stage to reject the evidence of those four

persons and come to the conclusion that they had not advanced monies in the present case. We are not able to accept this argument. The above

extract from the order of the Appellate Assistant Commissioner does not restrict in any sense the scope of the enquiry to be conducted by the

Income Tax Officer. As a matter of fact, the entire case of the assessee was that he had borrowed monies from the four persons referred to

already and only with reference to that contention the Appellate Assistant Commissioner directed the Income Tax Officer to conduct an enquiry

and send a report. There is absolutely nothing in the order of the Appellate Assistant Commissioner dated March 17, 1965, restricting the scope of

the enquiry or even impliedly showing that he had accepted the case of the assessee that he had borrowed monies from the said four persons.

Under these circumstances, we are of the opinion that the Tribunal cannot be said to have committed any error of law in holding that the case of

the assessee that he had borrowed monies from four Pondicherry parties had not been made out. Accordingly, we answer the first question in the

affirmative and against the assessee.

As far as the third question is concerned, it relates to the levy of penalty u/s 271(1)(c) of the Income Tax Act, 1961. That provision provides for

levy of penalty if an assessee has concealed particulars of income or furnished inaccurate particulars of such income. The learned counsel for the

assessee contended that the mere fact that the Income Tax authorities refused to accept the explanation offered by the assessee in respect of the

said sum of Rs. 47,770 and added the said sum as the income of the assessee would not automatically establish that the assessee had concealed

particulars of his income or furnished inaccurate particulars of such income, and that, therefore, the levy of penalty was not warranted in the

circumstances of this case. In support of this plea, he relied on a decision of the Bombay High Court in Commissioner of Income Tax, Ahmedabad

Vs. Gokuldas Harivallabhdas, and the observation of the Supreme Court in Commissioner of Income Tax, West Bengal I, and Another Vs. Anwar

Ali, , where the Supreme Court has approved the decision of the Bombay High Court referred to above. In the first decision referred to above, the

Bombay High Court observed (page 105) :

The proceedings u/s 28(1)(c) (corresponding to Section 271(1)(c) of the Income Tax Act, 1961) in their very nature are penal proceedings, and

the elementary principles of criminal jurisprudence must apply to these proceedings, and nothing is more elementary at least in this country in

criminal jurisprudence than the principle that ths-burdejTof proving that the accused is guilty is always upon the prosecution, and Mr. Joshi seems

to suggest, though not quite definitely, because he cannot do so, but impliedly that the principle somehow gets altered when we come to the

revenue law. Now, the assessee is not charged with having given a false explanation. This is not the gist of the offence u/s 28(1)(c). The gist of the

offence u/s 28(1)(c) is that the assessee concealed the particulars of his income or deliberately furnished inaccurate particulars of such income.

Therefore, the department must establish that the receipt of Rs. 15,203 constitutes ''income'' of the assessee. There is not an iota of evidence on

the record except the explanation given by the assessee, which explanation has been found to be false. Now it does not follow that because the

particular explanation given by the assessee is false, therefore, necessarily the receipt of Rs. 15,203 constitutes a taxable income of the assessee.

There may be a hundred and one other possibilities as to how this receipt came into the books of account of the assessee.

In the second decision, the Supreme Court before which the decision of the Bombay High Court was cited, after referring to the said decision

with approval, proceeded to point out (page 701):

Another point is whether a finding given in the assessment proceedings that a particular receipt is income after rejecting the explanation given by

the assessee as false would, prima facie, be sufficient for establishing, in proceedings u/s 28, that the disputed amount was the assessee''s income.

It must be remembered that the proceedings u/s 28 are of a penal nature and the burden is on the department to prove that a particular amount is a

revenue receipt. It would be perfectly legitimate to say that the mere fact that the explanation of the assessee is false does not necessarily give rise

to the inference that the disputed amount represents income. It cannot be said-that the finding given in the assessment proceedings for determining

or computing the tax is conclusive. However, it is good evidence. Before penalty can be imposed the entirety of circumstances must reasonably

point to the conclusion that the disputed amount represented income and that the assessee had consciously concealed the particulars of his income

or had deliberately furnished inaccurate particulars.

We are of the opinion that neither of the two decisions is of any assistance to the case of the assessee in the present case. In the present case,

it is not merely a question of the department not accepting the explanation given by the assessee as to the persons from whom he got the money.

As a matter of fact, before the assessee came up with the explanation that he borrowed the money from four persons in Pondicherry, he had earlier

suppressed the very existence of the money itself by showing in his accounts that he purchased oil seeds on credit, while as a matter of fact he had

actually paid cash for the said purchase. Therefore, it cannot be contended that the penalty has been levied in the present case solely by rejecting

the explanations offered by the assessee with regard to the source of Rs. 47,700. On the other hand, the penalty has been levied as a result of the

inference drawn from the combined operation of the following facts :

(1) that the assessee has deliberately shown in his account books that he purchased oil seeds on credit, while as a matter of fact he had paid cash

for the same;

(2) that when the assessee was called upon to explain this position as to why he made such false entries in his account books for a period of nearly

two years, namely, from August 1962 to 1964, when the assessment proceedings after the issue of notice u/s 148 of the Income Tax Act, 1961,

were pending before the Income Tax Officer, the assessee did not come forward with any explanation in this behalf at all;

(3) that the assessee came forward with a new case of borrowal from four persons in Pondicherry only before the Appellate Assistant

Commissioner ; and

(4) that the case of borrowal was found to be false.

These facts and the inference drawn by the authorities from these facts will clearly satisfy the requirements laid down by the Supreme Court

constituting the last sentence in the extract given above, namely (page 701):

Before penalty can be imposed the entirety of circumstances must reasonably point to the conclusion that the disputed amount represented income

and that the assessee had consciously concealed the particulars of his income or had deliberately furnished inaccurate particulars.

The deliberate act of the assessee in showing the cash purchases as credit purchase can lead only to one inference, namely, that he had

consciously concealed the particulars of his income.

Under these circumstances, we are unable to accept the contention of the learned counsel for the assessee in this behalf and, therefore, we

answer the third question in the affirmative and against the assessee.

As far as the second question is concerned, the only argument advanced before us is that the authorities had not considered the explanation of

the assessee for not paying the tax. As a matter of fact, the statutory provision, as it stood at the relevant time, did not contemplate the assessee

giving any such explanation and the authorities accepting such explanation. Section 221(1) of the Income Tax Act, 1961, as it stood at the relevant

time, read as follows :

When an assessee is in default or is deemed to be in default in making a payment of tax, he shall, in addition to the amount of the arrears and the

amount of interest payable under Sub-section (2) of Section 220, be liable to pay by way of penalty, an amount which, in the case of a continuing

default, may be increased from time to time, so, however, that the total amount of penalty does not exceed the amount of tax in arrears :

Provided that before levying any such penalty, the assessee shall be given a reasonable opportunity of being heard.

Therefore, the liability to pay the penalty is attracted by the mere commission of default and hence there was no question of the assessee

offering any explanation as to why the default had occurred and the officer accepting such explanation.

Under these circumstances, our answer to the second question is also in the affirmative and against the assessee.

The department will be entitled to its costs of this reference from the assessee. Counsel''s fee is fixed at Rs. 500 (Rs. Five hundred only).