Commissioner of Income Tax vs Chandrakant M. Tolia

Thanikkachalam, J.—In pursuance of the direction given by this Court, the Tribunal referred the following two questions for our opinion

under s. 256(2) of the IT Act, 1961 (hereinafter referred to as ""the Act"") :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in cancelling the penalty levied under s. 271(1)(c) for the asst.

yrs. 1964-65 and 1965-66?

Whether the Tribunal''s finding that there was no fraud, gross or wilful neglect on the part of the assessee is based on valid materials and is a

reasonable view to take on the facts of the case ?

These tax cases relate to the asst. yrs. 1964-65 and 1965-66. The assessee (now deceased) was a partner in four firms, viz., (1) C. J. Sheth &

Co., Madras; which was carrying on business as general merchants and in pharmaceuticals; (2) Rathod Trading Co., Madras; (3) Pacoda Metal

Industries, and (4) C. J. Sheth & Co., Bangalore. Besides, he was also carrying on agency business and derived income by way of dividends,

sitting fees, etc. He filed the return on 31st March, 1965, disclosing an income of Rs. 19,487 for the asst. yr. 1964-65. The assessment was

completed on 12th March, 1969, on a total income of Rs. 1,26,511. In doing so, the ITO made an addition of Rs. 75,000 under the head ""Other

sources"" representing the increase in the peak of the credits appearing in the names of various multani bankers in the books of the assessee. The

ITO also disallowed Rs. 32,085 claimed to have been paid as interest by the assessee to the aforesaid multani bankers in determining the income

under the head ""Business"". Such addition and disallowance were made on the ground that the assessee had not established the genuineness of the

transactions evidenced by the credit entries in the names of the multani bankers and the entries relating to payment of interest.

On appeal, the AAC set aside the assessment upholding the assessee''s plea that he had not been given an opportunity to establish the genuineness

of the transactions evidenced by the aforesaid entries.

The ITO proceeded to make a fresh assessment in accordance with the directions given by the AAC and required the assessee to comply with

the aforesaid conditions. He offered to issue summons to the bankers if the assessee so desired on payment of bata therefor. But, the assessee did

not avail of the opportunity but contended that he could not be called upon to furnish the addresses of the bankers or examine the bankers as

witnesses and pay bata for them. According to the assessee, he had discharged the onus of establishing the genuineness of the entries in question

by producing the discharged hundis. However, the ITO completed the assessment on 11st Sept., 1970, determining the total income as Rs.

3,72,500 after adopting the correct share income from the various firms. In doing so, the ITO once again included Rs. 75,000 under the head

Other sources"" representing the increase in the peak of credits in the names of the multani bankers and disallowed Rs. 32,085 claimed to have

been paid by the assessee as interest to the aforesaid bankers. The ITO also initiated penalty proceedings under s. 271(1)(c) of the Act. On an

appeal preferred by the assessee, the AAC confirmed the order passed by the ITO.

During the pendency of the appeal before the Tribunal, the IAC issued notice to the assessee requiring him to show cause against the levy of

penalty for the alleged concealment of income for the asst. yr. 1964-65. It was contended by the assessee before the IAC, that there was no

concealment of income on his part and that the assessment itself had been wrongly made. The IAC, not being satisfied with the explanation offered

by the assessee, levied a penalty of Rs. 42,000 under s. 271(1)(c) of the Act.

For the asst. yr. 1965-66, the assessee filed the return on 22nd April, 1967, disclosing loss of Rs. 82,945. But, the ITO by his order dt. 29th

Feb., 1970, determined the total income as Rs. 5,64,820. In doing so, he brought to tax Rs. 3,30,000 being the peak of the credits standing in the

names of various multani bankers in the books of the assessee and also disallowed Rs. 31,742 being the interest claimed to have been paid by the

assessee to such bankers on the ground that the assessee had not established the genuineness of those transactions. He also initiated action for levy

of penalty under s. 271(1)(c) of the Act. Aggrieved by such assessment, the assessee preferred an appeal to the AAC contending that the ITO

should have accepted the version about the genuineness of the transactions evidenced by cash credit entries and the entries relating to payment of

interest. It was further submitted that in any event since the peak of the credit amounted to Rs. 3,30,000 for the asst. yr. 1964-65 and since there

was no increase in the peak for the asst. yr. 1965-66 nothing could be added for this assessment year. The AAC accepted the latter contention

and directed deletion of Rs. 3,30,000 that had been added under the head ""Other sources"". He sustained the disallowance of Rs. 31,742 claimed

to be interest payment.

During the pendency of the appeal before the Tribunal, the IAC issued notice to the assessee requiring him to show cause against the levy of

penalty for alleged concealment of income. The assessee represented that there was no concealment and that no penalty could be levied. The IAC

not being satisfied with the explanation offered levied a penalty of Rs. 5,790.

However, on appeal, the Tribunal, considering the various contentions raised by the assessee, came to the conclusion that there was no

concealment on the part of the assessee so as to warrant penalty under s. 271(1)(c) of the Act for both the assessment years under consideration.

Accordingly, the levy of penalty for the assessment years under consideration was cancelled.

According to learned standing counsel for the Department, in the proceedings before the IAC, proper opportunities were given to the assessee

to prove the genuineness of the credits found in the account books and the dealings with the multani bankers. Though the assessee undertook to

summon the multani bankers it failed to pay bata for their appearances. The assessee has not availed of the opportunities given to him in the matter

of furnishing an explanation for not levying penalty under s. 271(1)(c) of the Act. In order to support this line of argument learned standing counsel

relied on a decision of the Supreme Court in the case of Commissioner of Income Tax (Additional), Lucknow Vs. Jeevan Lal Sah, .

According to learned standing counsel, the assessee failed to establish the genuineness of the cash credits in the books relating to the multani

bankers and that would be sufficient to come to the conclusion that the assessee has furnished inaccurate particulars so as to warrant penalty under

s. 271(1)(c) of the Act. Learned standing counsel also relied on a decision of this Court in Commissioner of Income Tax Vs. T.K. Manicka

Gounder, in support of his submission that the initial burden placed upon the assessee was not discharged by him. Learned standing counsel further

submitted that the principle laid down in Commissioner of Income Tax, West Bengal I, and Another Vs. Anwar Ali, is no longer good law after the

Explanation was added to s. 271(1)(c) of the Act. Learned standing counsel also brought to our notice a decision of this Court rendered in the

case of the same assessee reported in Commissioner of Income Tax Vs. Chandrakant M. Tolia, , wherein on similar facts relating to the asst. yrs.

1962-63 and 1963-64, this Court held that no penalty can be levied under s. 271(1)(c) of the Act in respect of the cash credits found relating to

the multani bankers. Learned standing counsel pointed out that the decision in CIT vs. Chandrakant M. Tolia (supra) is distinguishable on facts.

According to learned standing counsel, in the present case, the assessee undertook to summon the witnesses in order to prove the genuineness of

the cash credits but there was no response from the assessee after the notice was issued by the IAC. According to the facts arising in Chandrakant

M. Tolia''s case (supra), the assessee did not undertake to summon the multani bankers in order to prove the genuineness of the cash credits

standing in the name of the multani bankers. Therefore, according to learned standing counsel, inasmuch as, the assessee has furnished inaccurate

particulars in the present assessment years under consideration penalty under s. 271(1)(c) is exigible. On the other hand, none was present on

behalf of the assessee. We have, heard learned standing counsel and perused the records carefully.

We have already set out the facts in detail.

The point for consideration is : Whether the assessee has furnished inaccurate particulars warranting penalty under s. 271(1)(c) of the Act ?

In the quantum appeal the Tribunal has confirmed the addition of Rs. 75,000 under the head ""Other sources"" and the disallowance of interest of

Rs. 32,085 for the asst. yr. 1964-65 and the disallowance of interest of Rs. 31,742 for the asst. yr. 1965-66. This sum of Rs. 75,000 has been

brought under the head ""Other sources"" for the asst. yr. 1964-65 only on the ground that the assessee has not explained the genuineness of the

transactions evidenced by the credit entries standing in the names of various multani bankers in its books. The said sum represented the increase in

the peak credits during the asst. yr. 1964-65. The assessee was directed to produce the multani bankers and also directed to pay bata to take

summons to the multani bankers to give evidence in the present case. But the assessee did not do so. However, the assessee produced the

discharged hundis and the account books wherein entries were made with regard to the amounts from multani bankers. Since the explanation

offered by the assessee was not sufficient to prove the genuineness of the amounts borrowed on hundis the addition was made by the ITO which

was ultimately confirmed by the Tribunal. But, in the present case, after the Explanation was added to s. 271(1)(c) of the Act, it is for the assessee

to prove that the failure to return the correct income or furnishing of inaccurate particulars did not arise from any fraud or any gross or wilful

negligence on his part. The Explanation will apply only where the total income returned by any person is less than 80% of the assessed income. It is

no doubt true that after the Explanation was added to s. 271(1)(c) of the Act, the decision rendered by the Supreme Court in Anwar Ali''s case

(supra) is no longer good law. In this case, we have to see whether the failure to prove the genuineness of the hundi loans would amount to

furnishing inaccurate particulars deliberately and wilfully. It is well-known that the standard of proof required for proving the genuineness of the

cash credit in the assessment proceedings is different from the standard of proof required for establishing whether there is any wilful negligence or

fraud on the part of the assessee in furnishing inaccurate particulars. Similarly because in the assessment proceedings the cash credits were added

as income since the assessee failed to prove the genuineness of such credits and on the same basis it is not possible to say that the assessee has

furnished inaccurate particulars wilfully in the penalty proceedings. These transactions were going on for the past twelve years prior to the

assessment years under consideration and hence the assessee cannot be asked to produce evidence to show that the amounts borrowed from the

multani bankers are genuine transactions. In fact, the assessee has produced the discharged hundis which contain the names and addresses of the

persons from whom the amounts were borrowed. The assessee has also produced the account books where entries were made with regard to the

amounts borrowed from the multani bankers. When so much particulars were furnished before the ITO, it cannot be said that there is any

concealment of income as contemplated under s. 271(1)(c) of the Act. Further, the fact that the amounts borrowed from the multani bankers were

added as income in the assessment proceedings would not automatically go to show that the assessee has furnished inaccurate particulars. In fact,

a sum of Rs. 75,000 has been brought to tax under the head ""Other sources"" for the asst. yr. 1964-65 only.

Similarly, in the asst. yrs. 1962-63 and 1963-64, proceedings under s. 271(1)(c) of the Act were initiated with regard to the borrowed loans

on hundis. While considering this issue in the case of the same assessee in the decision rendered in CIT vs. Chandrakant M. Tolia (supra), this

Court held that the penalty under s. 271(1)(c) of the Act is not exigible, since there is no furnishing of inaccurate particulars or any concealed

income as contemplated under s. 271(1)(c) of the Act.

Learned standing counsel for the Department pointed out that in the decision reported in CIT vs. Chandrakant M. Tolia (supra), the assessee

has not given any undertaking to summon and produce the multani bankers. But, in the assessment years under consideration the assessee

undertook to summon the multani bankers and produce them in order to prove the genuineness of the borrowals from the multani bankers.

Whether any undertaking has been given by the assessee for summoning the multani bankers or not, after the production of the discharged hundis

and the account books if there is any doubt in the mind of the Assessing Officer (AO) with regard to the genuineness of the entries made in the

account books, it is for the AO to disprove the same with cogent evidence. It means, after the production of the abovesaid materials, the initial

burden placed upon the assessee was discharged and the ultimate burden shifts on the AO to show that the cash credits found in the account

books are not genuine. In the present case, even though the discharged hundis and account books were produced disclosing the names and

addresses of the multani bankers, no further action was taken by the Department to examine those persons to prove the more non-genuine nature

of the entries made towards borrowals from the multani bankers.

Learned standing counsel also relied on a decision of this Court in CIT vs. Manicka Gounder (supra), wherein this Court held that the Tribunal

was not correct in cancelling the penalty levied under s. 271(1)(c) of the Act. According to the facts arising in the abovesaid decision, the assessee

filed his return for the asst. yr. 1971-72 disclosing the loss. The explanation offered by the assessee for credits totalling Rs. 27,000 in his accounts

was not accepted by the ITO. Therefore, this amount was added as income. Thereafter, penalty proceedings were initiated under s. 271(1)(c) of

the Act. It is in that case, the assessee has not disclosed the cash credits of Rs. 27,000 in the original return filed. Hence, the question arose

whether the assessee has concealed the income. But, according to the facts arising in the present case from the earlier assessment years, the

assessee was consistently showing the amounts borrowed from multani bankers and the interest paid to them. Since the ITO doubted the

genuineness of the borrowals, he reopened the assessment under s. 147 of the Act. Therefore, in the present case there is no question of any

concealment of any particulars as stated under s. 271(1)(c) of the Act. Therefore, this decision would not render any assistance for finding fault

with the conclusions arrived at by the Tribunal in the present case.

Learned standing counsel also relied on the decision of the Supreme Court in Addl CIT vs. Jeevan Lal Sah (supra). This decision lays down

the general proposition, viz., that after the introduction of the Expln. to s. 271(1)(c) of the Act, where the total income returned by the assessee is

less than 80 per cent of the total assessed income, he shall be deemed to have concealed the particulars of income or furnished inaccurate

particulars of such income for the purpose of s. 271(1)(c) 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. The Explanation, thus, shifts the burden to the assessee in the situation covered by it. If he fails to

establish the same, the presumption will become a finding and it would be open to the authority to levy the penalty. But, if the assessee establishes

that his failure to return the correct income was not on account of any fraud or any gross or wilful neglect on his part, it is evident, no penalty can

be levied. According to the facts arising in the present case from the earlier assessment year onwards, i.e., from 1962-63 onwards, the assessee

was disclosing the borrowals from the multani bankers by producing the discharged hundis, and the interest due to them which were entered in the

account books. Therefore, it cannot be said that there is any concealment or any furnishing of inaccurate particulars on the part of the assessee.

Thus, inasmuch as, in the present case, the Department failed to establish that the assessee furnished inaccurate particulars on account of any fraud

or any gross or wilful neglect on his part, and failed to discharge the ultimate burden placed on it the Tribunal was correct in deleting the penalties

levied by the authorities below in the assessment years under consideration. Accordingly, we answer the questions referred to us in the affirmative

and against the Department. No costs.