Commissioner of Income Tax v. M. P. Narayanan — 1998 DIGILAW 730 (MAD)

Judgment :- N.V. BALASUBRAMANIAN, J. All the tax cases under reference relate to the challenge to the levy of penalties on three assessees who are respondents herein. TC Nos. 913 & 914 of 1986 and TC Nos. 1458 & 1459 of 1986 arise under the IT Act, 1961 (hereinafter to be referred to as 'the Act'). TC No. 921 of 1986 arises under the WT Act, 1957 (hereinafter to be referred to as 'the WT Act'). In so far as TC Nos. 913 & 914 of 1986 are concerned, the assessee, one M. P. Narayanan, is an individual and the assessment years involved are 1965-66 and 1966-67. In so far as TC Nos. 1458 and 1459 of 1986 are concerned, the assessee M/s M. P. Narayanan is a registered firm and the assessment years involved are 1970-71 and 1971-72. In TC No. 921 of 1986, the assessee is one Sethukumari and the assessment year involved is 1974-75. 2. In TC Nos. 913 & 914 of 1986, the following three questions of law have been referred at the instance of the Revenue by the Tribunal for our consideration : "1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified and had valid materials to hold that on merits there is no case for levy of penalty under s. 271(1)(c) ? 2. Whether the Tribunal was justified on the material on record and in law to hold that no penalty could be validly levied under s. 271(1)(c) in respect of addition made invoking s. 68 of the IT Act ? 3. Whether on the facts and in the circumstances of the case, the Tribunal is justified in cancelling the penalties imposed without considering the applicability of explanation to s. 271(1)(c) of the IT Act, 1961 ?" 3. The questions of law referred to us in TC Nos. 1458 & 1459 of 1986 are almost similar to the questions of law referred in TC Nos. 913 & 914 of 1986 and the questions read as under : "1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified and had valid materials to hold that on merits there is no case for levy of penalty under s. 271(1)(c) ? 2. 913 & 914 of 1986 and the questions read as under : "1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified and had valid materials to hold that on merits there is no case for levy of penalty under s. 271(1)(c) ? 2. Whether the Tribunal was justified on the material on record and in law to hold that no penalty could be validly levied under s. 271(1)(c) in respect of additions made invoking s. 68 of the IT Act ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in cancelling the penalties imposed without considering the applicability of Expln. to s. 271(1)(c) of the IT Act, 1961 ?" 4. In the case of Sethukumari in TC No. 921 of 1986, the following questions of law have been referred to us for our consideration : "1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified and had valid materials to hold that there is no case for levy of penalty under s. 18(1)(c) of the WT Act ? 2. Whether the Tribunal was justified on material on record and in law to hold that no penalty under s. 18(1)(c) is exigible in respect of value of silverware, omitted by the assessee to disclose in her original return of wealth ?" 5. The cases have been heard together as the common question of law involved is whether the penalty can be levied on account of certain cash credit additions made in the hands of the firm and consequently, the partners in the firm can be subjected to levy of penalty with reference to the additions made in the firm's assessment. Hence, it is necessary to notice the facts in TC Nos. 1458 and 1459 of 1986, the case of the assessee-firm for a comprehensive view of the matter. 6. The assessee in TC Nos. 1458 of 1459 of 1986 is the firm, M/s M. P. Narayanan, Madras and it consists of four partners. It carried on the business of purchase and sale of scraps. The assessee-firm filed its return of income for the asst. yr. 1970-71 admitting an income of Rs. 1, 58, 581. The assessment was completed on 25th April, 1970 determining the total income of Rs. 1, 64, 760. It carried on the business of purchase and sale of scraps. The assessee-firm filed its return of income for the asst. yr. 1970-71 admitting an income of Rs. 1, 58, 581. The assessment was completed on 25th April, 1970 determining the total income of Rs. 1, 64, 760. The assessee-firm filed its return of income for the asst. yr. 1971-72 disclosing an income of Rs. 1, 56, 242. The ITO completed the assessment on 13th May, 1971 determining the total income of Rs. 1, 63, 683. It seems that there was an investigation by the ITO as regards the income earned by the assessee-firm and the assessee-firm filed its revised return for the asst. yr. 1970-71 on 9th April, 1973 admitting a further income of Rs. 75, 000, being the cash credits appearing in the names of 12 parties, and a sum of Rs. 9, 664 being the interest alleged to have been paid to the creditors. On the same day, the assessee-firm filed its revised return for the asst. yr. 1971-72 disclosing a further income of Rs. 7, 200 being the interest alleged to have been paid to various creditors. Since the assessments had been completed, the revised returns filed were regularised by issue of notice under s. 148 of the Act and the assessments were completed determining the total income of Rs. 2, 49, 420 for the asst. yr. 1970-71 and Rs. 1, 70, 880 for the asst. yr. 1971-72. The ITO on the basis that there was concealment of particulars of income in the original returns filed, initiated proceedings for penalty by issue of notice under s. 274 r/w s. 271(1)(c) of the Act. After hearing the assessee-firm, the ITO levied a penalty of Rs. 84, 664 for the asst. yr. 1970-71 and Rs. 7, 200 for the asst. yr. 1971-72. 7. The assessee-firm filed appeals before the CIT(A) challenging the orders levying penalty. The CIT(A) cancelled the penalties on the question of jurisdiction and also on merits of the case as well. The Tribunal, on further appeal by the Department did not agree with the view of the CIT(A) on the question of jurisdiction. yr. 1971-72. 7. The assessee-firm filed appeals before the CIT(A) challenging the orders levying penalty. The CIT(A) cancelled the penalties on the question of jurisdiction and also on merits of the case as well. The Tribunal, on further appeal by the Department did not agree with the view of the CIT(A) on the question of jurisdiction. However, on the question of merits, the Tribunal held that the assessee-firm had come forward with a settlement on terms that the penalty may not be imposed and there was no admission by the assessee-firm that there was concealment of income in the returns filed by the assessee-firm. The Tribunal held that there was no evidence that the income added to the assessee-firm's income by rejecting the explanation of the assessee was really the income of the assessee and it could not be charged for the concealment of such income. The Tribunal upheld the order of the CIT(A) holding that there was no justification for imposing penalty on the merits of the case, and accordingly, the Tribunal dismissed the appeal preferred by the Revenue. 8. In the individual assessments of M. P. Narayanan, penalties were also levied for the same reasons stated for the levy of penalty on the firm. The Tribunal following its order rendered in the assessee-firm's case, held that there was no case for levy of penalty. 9. In the another partner's case, viz., Sethukumari's case, additions were made on account of additions of the amounts appearing in the firm's account and penalties were levied for non-disclosure of the same in the original return filed by the individual assessee. The Tribunal following its order in the assessee-firm's case, cancelled the penalty for non-disclosure of particulars in the original return. As regards the additions made towards silverware, the Tribunal accepted the case of the assessee that in the original return, the assessee had not disclosed the value of the silverware on the belief that the silverware would come under the category of jewellery as the jewellery was not to be assessed to tax under the WT Act. The Tribunal held that there was only an omission to include the value of silverware and therefore, the penalty cannot be levied on both items in question. Against these orders of the Tribunal, at the instance of the Revenue, references have come before us. 10. The Tribunal held that there was only an omission to include the value of silverware and therefore, the penalty cannot be levied on both items in question. Against these orders of the Tribunal, at the instance of the Revenue, references have come before us. 10. In the order passed under s. 271(1)(c) of the Act in the case of the assessee-firm, the ITO noticed that the income admitted in the revised return was Rs. 2, 49, 424 which included credits amounting to Rs. 75, 000 with interest of Rs. 9, 664. It is, no doubt, true that the assessee filed revised return after the completion of the original assessment on 25th April, 1970. The ITO subsequently issued a notice of reassessment and the revised return filed was taken to have been filed in response to the notice under s. 148 of the Act. The reassessment also was completed on the basis of the revised return. The case of the assessee before the ITO was that the assessee had filed the return voluntarily before the detection by the Department and there was no intentional concealment on the part of the assessee. The ITO relied upon certain statements made in the petition filed before the CIT under s. 271(4A)(now 273A) of the Act and according to him, the settlement made in the petition would be sufficient to show that there was concealment of income in the original return. According to the officer, since there was no supporting document in favour of the creditors, the assessee-firm was making the disclosure. The ITO arrived at the conclusion on the basis that the assessee was not willing to examine anyone of the so-called creditors to show that they were the real and genuine creditors and the fact that the assessee came forward voluntarily was also not correct. The ITO recorded a finding that only after some information obtained by the Department that there were bogus credits in the names of one Sivaraman and his family members, the assessee offered the credits as its income and therefore, there is no question of voluntary return of its income. The same reasoning given in the order passed in the case of assessee-firm was given in the orders passed on the individual assessee, M. P. Narayanan and another assessee namely, Sethukumari. 11. The same reasoning given in the order passed in the case of assessee-firm was given in the orders passed on the individual assessee, M. P. Narayanan and another assessee namely, Sethukumari. 11. The CIT(A) found that the refusal of the ITO to accept the plea of the assessee that the assessee voluntarily filed the revised return was not justified. The CIT(A) noticed the findings of the ITO that there was information at the earliest in August, 1972 that there were bogus credits was not correct, as he found that the records show that no enquiry had been made to find out whether the credits belonged to the assessee or the said Sivaraman and the ITO was wrong in concluding that there was some information in his possession even before the filing of the revised return. The finding of the CIT(A) that the assessee came forward voluntarily before any enquiry was made by the ITO is a finding of fact and it is clear that no further enquiry was made by the ITO before filing of the return by the assessee. After the filing of the return, there was a considerable suspicion as to whether the credits really belonged to the creditor Sivaraman and his family members or to the assessee and the CIT found that the ITO had not gathered any further information to support the case of the Department that the amounts credited and the interest really belonged to the assessee and the charge of concealment of income had not been established. 12. The Tribunal concurred with the CIT(A). It referred to the letter dt. 6th April, 1973 filed along with the revised return and held that the assessee had come forward with the settlement on terms that the penalty may not be imposed and there was no confession of concealment of income either in the letter or in the revised return. The Tribunal also held that the Department has not established that the assessee had concealed income or there was an unequivocal admission of concealment of income and the imposition of penalty was not warranted on the facts of the case. The Tribunal also held that there is no evidence except the provisions of s. 68 of the Act to show that the credits added were the income of the assessee. 13. The Tribunal also held that there is no evidence except the provisions of s. 68 of the Act to show that the credits added were the income of the assessee. 13. We are of the opinion that the finding of the Tribunal that there was no concealment of income is purely a finding of fact. The ITO might have been justified in making the addition in the assessment of income on the basis of the revised return filed by the assessee. The assessee itself filed the revised return on the basis of settlement and the letter of the assessee dt. 6th April, 1973 shows that since the assessee was not able to prove conclusively that the credits were genuine, it came forward to offer credits as its income. The penalty proceeding on the other hand, is an independent proceeding and the Department has not invoked the Expln. to s. 271(1)(c) of the Act. The Supreme Court in the case of Sir Shadilal Sugar & General Mills Ltd. vs. CIT, held that there may be hundred and one reason for the assessee to agree to the addition as income, but that does not absolve the Revenue from proving the mens rea of a quasi criminal offence. This Court in the case of CIT vs. C. J. Rathnaswamy has applied the principle and held that from the mere fact that the assessee had admitted the income in the revised return is not conclusive of the factum of concealment of income by the assessee in the original return. The assessee in the instant case, in the reply to the show cause notice to the penalty proceedings has clearly stated that there was no intentional concealment on the part of the assessee. The ITO relied upon the some statement in the petition filed by the assessee before the CIT for waiver of penalty under s. 271(4A) of the Act. The ITO, in our opinion, should have realised that the proceeding for waiver of penalty is entirely a different proceeding and it is not open to the ITO to rely upon the statement made by the assessee for the purpose of waiver of penalty to come to a conclusion that there was concealment of income. In the penalty proceedings, it is the duty of the ITO to establish by evidence that there was concealment of income and the amount added represented the assessee's income. In the penalty proceedings, it is the duty of the ITO to establish by evidence that there was concealment of income and the amount added represented the assessee's income. It is well settled that the mere fact that the assessee agreed for the inclusion of cash credit and other amounts in the total income on account of inability to prove the source or to avoid protracted litigation would not justify the Department in levying the penalty (Vide : Kanga and Palkhivala's Income-tax Eighth Edn., Vol. I, p. 1637). It is for the Department to prove that there was a conscious and deliberate concealment on the part of the assessee and the amount added represented the assessee's income. The above proposition is well settled by the Supreme Court in CIT vs. Anwar Ali, after the receipt of reply from the assessee to his show cause notice, has not conducted any further enquiry. The assessee no doubt has stated that there were no supporting documents to prove the credits but that statement itself would not be sufficient to hold that the credits were not genuine or that the assessee had admitted that there was the concealment of income. The statement of the assessee has to be read as a whole and the assessee had stated that there was no documentary evidence to prove the credits standing in the names of Sivaraman and his relatives. But, from the statement it cannot be assumed that the assessee had admitted that it had concealed the particulars of income in the revised return. There was no acknowledgement of concealment. There is also no admission by the assessee, which can be used against it, that the credits represented its income and it had concealed the income in the original return. The burden is on the Department to prove that the assessee had concealed the particulars of income and that the amounts added represented the income of the assessee. The twin conditions must be satisfied before the levy of the penalty. The ITO has not done any further enquiry by issue of notice to the creditors or to the assessee or has not obtained a statement from the assessee to establish that there was concealment of particulars of income by the assessee. The twin conditions must be satisfied before the levy of the penalty. The ITO has not done any further enquiry by issue of notice to the creditors or to the assessee or has not obtained a statement from the assessee to establish that there was concealment of particulars of income by the assessee. The action of the ITO in relying upon the statement made in a different proceeding to the levy of penalty cannot be justified and the penalty levied on the basis of the statement filed before the CIT for waiver of penalty cannot constitute a valid material to prove that there was concealment of income by the assessee and it is also not clear from the order of the penalty that the AO had informed the assessee about his intention to use the statement made by the assessee for waiver of penalty. The CIT(A) has correctly come to the conclusion that there was a considerable suspicion as to whether the credit and interest really belonged to the creditor and his family members or to the assessee which was upheld by the Tribunal. We are of the opinion, both the authorities have come to the correct conclusion in holding that the penalty cannot be levied as there was no case for the levy of penalty. 14. The decision of this Court in Addl. CIT vs. T. K. Perumalswamy, on which heavy reliance was placed by the learned counsel for the Revenue, is distinguishable on the facts of the case. In Perumalswamy's case, it was found that there was a suppression and concealment of income in the return filed at the time of original assessment proceedings and there was fabrication in returning the income derived from the sale of import licences and it was shown that the income was derived from the business of manufacture of textile goods. In that factual situation present in Perumalswamy's case, this Court held that there was concealment of original return and it was a deliberate concealment of income and therefore, the revised return filed after the completion of original assessment admitting the income from the sale of import licences would not absolve the assessee from the penalty proceedings. On the other hand, the facts of the case show that the assessee had come forward voluntarily and returned the income. On the other hand, the facts of the case show that the assessee had come forward voluntarily and returned the income. In the penalty proceedings, the Department merely relied upon the revised return and the statement filed before the CIT to come to the conclusion that there was concealment of income. Therefore, the view of the Tribunal that there was no case of levy of penalty is justified and the Tribunal has come to the conclusion that there was no concealment of income on the basis of materials on record. Therefore, we answer the three questions of law referred to us in TC Nos. 1458 and 1459 of 1986 in the affirmative and against the Revenue. 15. In so far as TC Nos. 913 & 914 of 1986 are concerned, the assessee is a partner and the penalty was levied for non-disclosure of the share of the assessee in the amount representing the cash credits found in the books of the assessee-firm. Since we have held in the firm's case that there was no case for the levy of penalty and the Tribunal has merely followed its order in the case of the firm, the cancellation of the penalty by the AAC as well as by the Tribunal in the assessee's case was justified and we find no error in the order of the Tribunal. Accordingly, we answer the three questions of law referred to us in TC Nos. 913 and 914 of 1986 in the affirmative and against the Revenue. 16. TC No. 921 of 1986, as we have already seen, is a case arising under the WT Act. The first question relates to the levy of penalty for not disclosing the share of the assessee in the cash credits found in the books of the assessee-firm. We have held in the firm's case that there is no case for levy of penalty and therefore, the failure to disclose the share in the cash credit from the firm as a part of the wealth of the assessee cannot be regarded as a case of concealment of wealth in the hands of the assessee. Therefore, the first question of law referred to us is required to be and is answered in the affirmative and against the Revenue. 17. Therefore, the first question of law referred to us is required to be and is answered in the affirmative and against the Revenue. 17. In so far as the second question is concerned, the assessee is a partner in the assessee-firm and in the original return filed, she has not disclosed the value of the silverware. The WTO has not taken into account the omission regarding the value of silverware to levy penalty under s. 18(1)(c) of the WT Act. The penalty levied was only with reference to concealment in the return of her share of the cash credit added in the firm's assessment. The penalty was cancelled by the AAC. The Tribunal held that there was no omission on the part of the assessee to disclose the value of the silverware in the original return and such omission was only because of a wrong conception of provisions of the law and the penalty cannot be levied under the WT Act. We have seen that the WTO has not levied penalty for the concealment of particulars to return the value of silverware in the order of penalty passed by him. The AAC in the appeal proceedings before him has also not levied penalty for such concealment. A contention was raised before the Tribunal that the AAC should have considered the issue and the penalty should be levied which was rejected by the Tribunal. 18. The Tribunal accepted the statement of the assessee that the assessee had omitted to show the value in the original return under an impression that the silverware would come in the category of jewellery and the jewellery was not assessable for wealth-tax, and as soon as she became aware that there was a mistake, she had chosen to file a return showing the value of the silverware. It is, no doubt, true that she filed the return including the value of some silver articles amounting to Rs. 17, 660 after the completion of the original assessment under the WT Act, but the Tribunal found that the explanation offered by the assessee was convincing and there was no intention on the part of the assessee to conceal the value of the silverware in the original return. 17, 660 after the completion of the original assessment under the WT Act, but the Tribunal found that the explanation offered by the assessee was convincing and there was no intention on the part of the assessee to conceal the value of the silverware in the original return. Though the Tribunal had not discussed the nature of the silverware, a fair reading of the order of the Tribunal shows that it was convinced with the explanation offered by the assessee and it was found to be bona fide and there was no concealment by the assessee in not returning the value of the silverware in the original return. Though the WTO as well as the AAC had not initiated any proceeding and levied penalty on the failure on the part of the assessee to disclose the value of the silverware in the order of penalty, the Tribunal has recorded a finding that there was no concealment in the original return. The question whether the Tribunal has jurisdiction to record such a finding when the matter was not considered by the WTO or by the AAC or whether the Tribunal could have exercised the powers of enhancement in respect of the matters not considered by the WTO or by the AAC is not a matter in issue. Since the Tribunal has accepted the explanation offered by the assessee that it was due to bona fide error on the part of the assessee that the value of the silverware was not included in the original return which was made good in the revised return, we are of the opinion, the finding of the Tribunal on the question of concealment of the value of the silverware is a finding of fact and the Tribunal was justified in holding that the omission did not warrant levy of penalty. Accordingly, we answer the second question of law referred to us in the affirmative and against the Revenue. 19. In the result, the various questions of law referred in all the tax cases are answered in the affirmative and against the Revenue. However, in the circumstances of the case, there will be no order as to costs.