Shree Nirmal Commercial Ltd. vs Commissioner of Income Tax

S.J. Kathawalla, J.—The Tribunal, Mumbai has at the instance of the assessee, referred to this Court the following questions arising out of the order of the Tribunal dt. 27th Sept., 1991 in IT Appeal Nos. 3301 and 3302/Bom/1987 for the asst. yrs. 1966-67 and 1967-68.

Asst. yrs. 1966-67 and 1967-68

Whether on the facts and in the circumstances of the case, penalty is leviable u/s 271(1)(c) of the IT Act, 1961?

Whether on the facts and in the circumstances of the case the Tribunal has rightly rejected the contention of the assessee in law that after lapse of 17 years as the assessee could not produce the depositor and accordingly no penalty should have been levied?

Whether on the facts and circumstances of the case when the income assessed u/s 68 of the Act, penalty u/s 271(1)(c) can be levied in law?

Whether on the facts and in the circumstances of the case, the Tribunal was right in confirming the penalty by relying upon the alleged statement made by the depositor in some other proceedings before some other officers?

Asstyr. 1967-68 only:

Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that Explanation to Section 271(1)(c) of the Act was applicable to the asst. yr. 1967-68?

The facts giving rise to the assessment order for asst. yr. 1966-67 are as under:

(i) For the asst. yr. 1966-67 the assessee had on 25th July, 1970 filed a return showing "nil" income. However, under the assessment order, the income determined as total income of the assessee was Rs. 2,90,500. The said income of Rs. 2,90,500 was included as undisclosed income of the assessee on the ground that the assessee had shown bogus loans from five different parties. The said assessment (original assessment) was completed on 23rd July, 1971.

(ii) The original assessment was thereafter set aside by AAC, D-Range, Mumbai vide his order No. DAP-166/1971-72 dt. 4th March, 1972 with a direction to redo it after giving proper opportunity to the assessee to substantiate its claims.

(iii) With a view to give a fresh opportunity to the assessee to substantiate its claims, the assessee was asked by a letter dt. 13th Aug., 1981 (i.e. approximately 10 years from the date of setting aside of the original assessment) to produce all necessary details and evidence in support of its claims in respect of the loans in question. The assessee through its representative appeared before the ITO and requested that summonses be issued to the five parties who had advanced loans to the assessee during the relevant assessment year and also provided their respective addresses. Out of the five parties/concerns, whose addresses were provided by the assessee to the ITO, four of them appeared before the ITO and satisfied him that the loans given by them were genuine. Only in one case i.e. the case of M/s Ramgopal Laxminarayan who had stated to have advanced the loan of Rs. 50,000, the summons was returned back with the postal remarks "unserved". Upon this being pointed out by the ITO to the assessee, the assessee submitted that in view of the matter being very old, i.e. more than 16 years had elapsed from the date when the loan was taken by the assessee, it was rather impossible for the assessee to bring the said M/s Ramgopal Laxminarayan before the authority. Since it was the assessee''s case that he had taken loan through a broker, the ITO asked him to produce the broker for cross-examination. However, the assessee pleaded his helplessness in the matter on similar grounds. These submissions of the assessee were rejected by the ITO on the ground that the said M/s Ramgopal Laxminarayan had earlier confessed that he has not advanced any loan to the assessee. The AO thereafter by his order passed in the year 1982 computed the total income of the assessee by adding Rs. 50,000 as income from undisclosed sources to the "nil" income shown by the assessee.

(iv) The assessee thereafter challenged the above quantum order passed in 1982 upto the Tribunal but was unsuccessful.

(v) Thereafter in mid June 1985 the AO initiated penalty proceedings against the assessee u/s 271(1)(c) of the IT Act. During the penalty proceedings before the AO, the assessee explained that the loan could not be substantiated because of the very long lapse of time. The explanation did not find favour with the AO and he invoked the provisions of the Explanation to Section 271(1)(c) as it stood between 1st April, 1964 and 31st March, 1976 and levied penalty of Rs. 50,000 against the assessee for the asst. yr. 1966-67.

(vi) The assessee challenged the order of the AO before CIT(A) who, inter alia, held that the assessment was set aside on 4th Sept., 1972 and reassessment was taken up only in 1981 and that after such a long gap it was impossible for any person to establish the genuineness of the transaction. The CIT(A), therefore, cancelled the penalty levied by the AO. The said order of CIT(A) was therefore, impugned by the Revenue before the Tribunal.

(vii) The Tribunal whilst deciding in favour of the Revenue and against the assessee held that no weight should be attached to the lapse of time before the original assessment and reassessment. The contention of the assessee as regards lapse of several years between the original assessment and reassessment was also rejected on the ground that the said contention was considered by the Tribunal at the time of deciding the quantum appeal and the same was rejected even at that time. The Tribunal did not find favour even with the assessee''s contention that no opportunity was allowed to the assessee to cross examine the creditors who had allegedly made a statement before another AO that the loan was only a Havala entry. The Tribunal also held that Explanation to Section 271(1)(c) raised a rebuttable presumption in favour of the Revenue and onus is on the assessee to rebut it and that the assessee failed to rebut the presumption because of which the penalty was rightly levied.

(ix) The Tribunal as stated above thereafter at the instance of the assessee, has made the above reference to this Court.

Asst. yr. 1967-68.

(i) For the asst. yr. 1967-68, the original assessment was completed on 30th March, 1972. The total income determined was Rs. 37,47,450. Subsequently, AAC, Special Range IV, Mumbai, vide his order dt. 12th April, 1973 had set aside the additions of Rs. 1,25,000 added as cash credits in respect of three parties. As directed by the AAC in his said order, a fresh opportunity was given to the assessee by ITO''s letter dt. 12th Aug., 1981 to produce necessary details and evidence in support of the claim of genuineness of the said cash credits. The assessee through its representative requested the AO to issue summons to the parties whose addresses were provided by the assessee to the officer. The summonses issued to two of the parties were returned back by the postal authorities with the remarks "left place". As far as the third party is concerned, he informed the AO that he is 72 years old and that he had preserved the books of account beginning from the asst. yr. 1971-72 onwards and all his previous records were destroyed by him because he never thought that there will be any necessity of production of the same at any time. He, therefore, pleaded his helplessness in complying with the requirement of the summons. However, he stated that he did remember to have had loan transactions with the assessee.

(ii) Thereafter the AO asked the assessee to produce the three parties before him, but the assessee expressed its helplessness on the same grounds that were stated by the assessee for the asst. yr. 1966-67. The AO, therefore, rejected the contention of the assessee and added a sum of Rs. 1,25,000 as income from undisclosed sources to the assessees'' negative/loss income of Rs. 4,64,301 and thereafter computed its total income as negative/loss income of Rs. 3,39,301. This order was challenged by the assessee upto the Tribunal and the only relief that the assessee could get was that the sum of Rs. 1,25,000 which was treated as his income from undisclosed sources was reduced to Rs. 75,000. The fact remains that the IT authorities also computed the total income of the assessee for the asst. yr. 1967-68 as negative/loss income even after the said addition of Rs. 1,25,000 as income from undisclosed sources.

(iii) The facts pertaining to penalty proceedings initiated against the assessee for the asst. yr. 1967-68 are identical to that of the asst. yr. 1966-67 since common orders were passed by AO, CIT(A) and Tribunal in respect of both the assessment years i.e. 1966-67 and 1967-68. Only one additional argument which the assessee had advanced before the Tribunal pertaining to the asst. yr. 1967-68 was that the Explanation to Section 271(1)(c) did not apply for the asst. yr. 1967-68 because although addition of Rs. 1,25,000 made by AO was more than 20 per cent of the loss returned, the addition as finally sustained of Rs. 75,000 in the quantum appeal by the Tribunal was less than 20 per cent of the returned loss. The said contention of the assessee was rejected by the Tribunal.

(iv) Thereafter the Tribunal preferred the present reference before this Court raising the questions as set out hereinabove.

Mr. Mehta appearing for the assessee after taking us through Section 271 of the IT Act, 1961 as it stood prior to its amendment, drew our attention to the Division Bench judgment of this Court in the case of Commissioner of Income Tax, Poona Vs. Bhimji Bhanjee and Co., . In that case, during the course of assessment proceedings under the relevant assessment years, the ITO while scrutinising the books of account had noticed certain cash credited in various accounts. The assessee admitted that there were certain cash credits in its books of account in favour of the named parties. However the assessee was unable to produce evidence to show that the cash credits were genuine. The assessee had not admitted that it had concealed any income. On this the ITO took a view that the assessee had failed to discharge the burden of proof and brought to tax amount of Rs. 10,590 as income of the assessee from undisclosed sources. The IAC proceeded to levy penalty of Rs. 10,590 under amended Section 271(1)(c) of the said Act. On an appeal preferred by the assessee to the Tribunal, the Tribunal allowed the same taking a view that the assessee had not admitted concealment of income and that merely because the amount of Rs. 10,590 was surrendered for taxation by the assessee, this did not ipso facto raise an inference that the assessee admitted that it was his concealed income.

From the aforesaid decision of the Tribunal the following question was referred to the Court:

Whether, on the facts and in the circumstances of the case, the Tribunal has erred in law in holding that the penalty levied on the assessee u/s 271(1)(c) of the Act for the asst. yr. 1968-69 was not sustainable?

The learned advocate appearing for the Revenue while impugning the order of the Tribunal submitted before the Court that the assessee had in fact admitted concealment of income and hence it was not necessary for the Revenue to prove the same. It was submitted by him that in view of this the burden was on the assessee to show that there was no concealment and the conclusion arrived at by the Tribunal was erroneous. The Revenue strongly relied on a decision in the case of Western Automobiles (India) Vs. Commissioner of Income Tax, Bombay City-I, Bombay, . In that case when the ITO discovered from the account books of the assessee, loans to the tune of Rs. 90,000, he came to a prima facie conclusion that the loans reflected the concealed income. The assessee firm agreed to the addition of the aforesaid amount of Rs. 90,000 as his business income for that year and addition was made by ITO as the assessee''s concealed income from business and not as income from undisclosed sources. The Court, therefore, was of the view that the facts in Western Automobiles (India) (supra) did not apply to the case being decided by them because the assessee had nowhere admitted that it had concealed its income and even the ITO had not added the additional amount as concealed income from business but as from undisclosed sources. This Court, therefore, in the case of CIT v. Bhimji Bhanjee & Co. (supra) decided the above question in negative and in favour of the assessee. Mr. Mehta on behalf of the assessee submitted before us that the decision in CIT v. Bhimji Bhanjee & Co. (supra) is clearly applicable to the present case.

Mr. Mehta next cited a decision of the Punjab & Haryana High Court in the case of Commissioner of Income Tax Vs. Prithipal Singh and Co., In that case the assessee had filed the return declaring loss of Rs. 3,35,830. The ITO vide his order found that it was a case of concealment and suppression of income as the assessee had furnished inaccurate particulars of its income. He computed the assessee''s income at Rs. 1,47,978 and in the course of assessment proceedings started penalty proceedings u/s 271(1)(c) of the IT Act, 1961 for the reason that the assessee had grossly understated its income. The assessee went in appeal before the AAC who determined the loss at Rs. 34,164 against the returned loss of Rs. 3,35,830. In the penalty proceedings initiated the ITO imposed penalty of Rs. 3,50,000 for concealment u/s 271(1)(c) of the IT Act for that assessment year. The assessee appealed before the Tribunal against imposition of the said penalty which appeal was allowed by the Tribunal holding that no penalty would be imposed upon the assessee when it had returned a loss and it had been assessed finally on a loss figure. Thereafter the CIT (Central), Ludhiana moved an application before the Tribunal, Amritsar which referred the following two questions to the Punjab & Haryana High Court:

(1) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding:

(a) that the provisions of the Explanation to Section 271(1)(c) will not be attracted to the present case?

(b) that the word ''income'' occurring in Clauses (c) and (iii) of Section 271(1) refers to a positive income only and not to a loss?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in cancelling the penalty order passed by the IAC by holding that no penalty could be levied against the assessee?

The Punjab & Haryana High Court answered all the questions set out hereinabove in the negative i.e. in favour of the assessee and against the Revenue in the following terms:

''Income'' has been defined in Section 2(24) of the Act which clearly includes profits, gains, dividends or other benefits derived only. Loss cannot possibly be termed as income. u/s 139(1) of the Act, a person is required to furnish a return only if his total income during the previous year exceeded the maximum amount which is not chargeable to Income Tax. If the same falls short of the maximum amount which is not chargeable, which has been the case here as per final assessment, he need not file a return. A person who sustains a loss, however, may file a return in view of Sub-section (3) of Section 139 of the Act if he wants to claim that the loss or any part thereof should be carried forward. The penal provisions of Section 271(1)(c), therefore, are attracted only in the case of an assessee having positive Income and not loss, as the question of concealment of income to avoid payment of tax would arise only in the former case. Penalty is a deterrent measure to prevent evasion of tax and when there was no tax payable, there could not be any such evasion so as to provide a scope for levying any penalty. In the present case, only the loss has been reduced and it cannot be said that the assessee had suppressed any income which would have attracted liability to tax. The question of imposition of penalty, therefore, did not arise. Thus, on the facts and in the circumstances of the case, the Tribunal has acted rightly in law in holding that the provisions of the Explanation to Section 271(1)(c) will not be attracted to the present case. The word ''income'' occurring in Clauses (c) and (iii) of Section 271(1) of the Act refers to positive income only and that no penalty could be levied against the assessee.

The aforesaid judgment of Punjab & Haryana High Court in CIT v. Prithipal Singh & Co. (supra) was impugned by the CIT before the Hon''ble Supreme Court of India by way of SLP. The Hon''ble Supreme Court was pleased to dismiss the said SLP as reported in Commissioner of Income Tax Vs. Prithipal Singh and Co., . Mr. Mehta submitted that the decision in CIT v. Prithipal Singh & Co. (supra) squarely applies to the present case.

Mr. Mehta also took us through the judgments reported in MOHD. ATIQ Vs. Income Tax OFFICER, DISTRICT II (V), KANPUR., ; KRISHNA BHATTA Vs. AGRL. Income Tax OFFICER AND OTHERS., and K.P. Narayanappa Setty and Co. Vs. Commissioner of Income Tax, wherein it is held that though no time limit may have been prescribed by IT Act imposing penalty, the penalty should be imposed within a reasonable time and that penalty levied after the delay of 14/16 years without any valid reason/explanation is invalid. Mr. Mehta submitted that in the present case penalty is levied on the assessee after about 16 years from the date of filing of the first assessment order without any valid reason/explanation and the same is therefore not valid.

We have considered the facts and circumstances of the case and also the case law cited by Mr. Mehta. In the present case in the reassessment for the asst. yr. 1966-67 an amount of Rs. 50,000 was added as income of the assessee through undisclosed sources. Similarly, in the reassessment for the asst. yr. 1967-68 the amount of Rs. 1,25,000 was treated as income of the assessee from undisclosed sources. The assessee at no point of time has admitted that the income treated by the authorities for asst. yr. 1966-67 and asst. yr. 1967-68 as income from undisclosed sources is concealed income. The ratio laid down by the Division Bench of this Court in the case of CIT v. Bhimji Bhanjee & Co. (supra), therefore, squarely applies to the facts of the instant case and we do not find any hesitation in coming to the conclusion that the IT authorities who have assessed the income of the assessee for asst. yr. 1966-67 and asst. yr. 1967-68 u/s 68 of the IT Act ought not to have levied any penalty u/s 271(1)(c) of the IT Act, 1961.

Again it is clear that by an order dt. 24th April, 1982, the ITO has computed the income of the assessee for asst. yr. 1967-68 as negative/loss income of Rs. 4,64,301. The ITO thereafter added an amount of Rs. 1,25,000 as income of the assessee from undisclosed sources and thereafter computed its total income as negative/loss income of Rs. 3,39,301. The ITO therefore finally assessed the assessee for asst. yr. 1967-68 at the loss figure amounting to Rs. 3,39,301. In view thereof, the decision of the Division Bench of Punjab & Haryana High Court in CIT v. Prithipal Singh & Co. (supra) to the effect that the word "income" occurring in Clauses (c) and (iii) of Section 271(1) of the Act refers to positive income only and that no penalty could be levied against the assessee who is assessed finally at a loss figure squarely applies to the present case. In fact, as set out earlier even the Hon''ble Supreme Court has declined to interfere with the said decision of the Punjab & Haryana High Court and dismissed the SLP filed against the said judgment by the CIT, Punjab & Haryana. In view thereof, we hold that in the present case no penalty could be levied u/s 271(1)(c) of the IT Act, 1961 and the question of application of Explanation to Section 271(1)(c) of IT Act does not arise.

On the issue pertaining to the delay in levying the penalty on the assessee, as set out hereinabove, the original assessment for asst. yr. 1966-67 was completed on 23rd July, 1971 and for asst. yr. 1967-68 on 30th March, 1972. The said orders were set aside and reassessment proceedings started after almost 10 years. The assessee has throughout taken a consistent stand that the contention of the tax authorities, that the person/s who had given the loans to the assessee had made a statement that they have in fact not given any loan is incorrect and was made before some other ITO in some other proceedings. The assessee has consistently contended that the alleged statements were made behind the back of the assessee and the assessee was never given any opportunity to confront them and/or cross examine them. No particulars of any such statement/s are on record. In any event, the said original assessment was set aside and the IT authorities themselves at the time of reassessment of the assessee''s income pertaining to asst. yr. 1967-68 and asst. yr. 1968-69 once again tried to summon the parties who had given loans to the assessee. The assessing authority surely did not expect all the parties to come forward with records which by that time were about 15/16 years old. Despite that four of the parties who had given loans to the assessee in the asst. yr. 1966-67 and whose loans were treated as bogus loans in the original assessment came forward with the documents and satisfied the taxing authorities about the genuineness of the loans given by them to the assessee. Even for the asst. yr. 1967-68 only two parties who had given loans to the assessee aggregating to Rs. 75,000 were disbelieved on the ground of them not being produced before the tax authorities. The penalty proceedings were admittedly initiated in the year 1985. We are, therefore, of the view that no penalty could have been levied on the assessee pertaining to the asst. yr. 1966-67 and asst. yr. 1967-68 on the ground that the assessee could not produce the depositors after a lapse of 17 years from the date of the loan received from the parties by the assessee. The Tribunal was also wrong in confirming the penalty levied by the ITO in the year 1985, relying upon the purported statements made by the depositors in some other proceedings before some other officers sometime in the year 1971-72 when admittedly the assessee was not given any opportunity to confront the said depositors by way of cross-examination.

For the aforesaid reasons all the four questions raised by the Tribunal in the present reference for the asst. yr. 1966-67 and asst. yr. 1967-68 and one question for the asst. yr. 1967-68 are answered in negative i.e. in favour of the assessee and against the Revenue. As set out in our order dt. 31st July, 2008 despite repeated opportunities given to the Revenue no one has appeared on behalf of the Revenue. We have, therefore, proceeded to pass the present order after hearing the advocate representing the assessee. In any event we do not pass any order as to costs.