L.K. Shaik Mohd. Bros. vs Commissioner of Income Tax

Ramaprasada Rao, J.—These two tax cases are more or less connect ed, in the sense that Tax Case No. 346 of 1970 relates to the

assessment year 1958-59 and Tax Case No. 348 of 1970 relates to the assessment year 1959-60. In each of these cases, a similar question has

been referred by the Income Tax Appellate Tribunal and the question is whether, on the facts and circumstances of the case, the penalty for each

of the assessment years in both the tax cases is justified in law. The assessee is a firm of jewellers.

We shall now take up T.C. No. 346 of 1970. The Income Tax Officer, the Appellate Assistant Commissioner as well as the Tribunal found that

there was a concealment and a non-disclosure of assessable income by the assessee. The Tribunal in its final order of assessment observed that the

two additions made were reasonable and were warranted in the circumstances. According to it, the explanation given by the assessee that it

secured the funds for the purpose of purchasing gold from its branch office was not worthy of credence. It not merely not accepted the bare

explanation furnished by the assessee, but on a further probe found that it was impossible for the principal office to have availed itself of all the

available cash at its branches so as to make the alleged purchases for which the principal office did not have the necessary funds. Having thus

negatived the bare explanation of the assessee and having applied its mind to the entry in the books of account and bearing in mind the surrounding

circumstances, the Tribunal came to the conclusion that the assessee was having some secret funds which it was retaining. It was in those

circumstances that the Income Tax Officer, the Appellate Assistant Commissioner and the Tribunal estimated the income to be added at Rs.

50,000 for one activity of the assessee and another sum of Rs. 10,000 for a different activity of ''his, which also suffers from the same infirmity as

above. As regards the second addition of Rs. 10,000, the explanation of the assessee was that one of partner''s relatives provided the said fund

and that was utilised by it in the course of its business. The evidence produced by the assessee supporting its theory that it secured a sum of Rs.

10,000 from one V.S.E. Mohamed Mohideen of Kayalpattinam was an affidavit sworn to by Mohamed Mohideen. Even the Income Tax Officer

wanted the assessee to produce this person for cross-examination, but he was not produced due to alleged ill health. Before the Appellate

Assistant Commissioner also no attempt was made to substantiate the recitals in the affidavit. It was in those circumstances that the Appellate

Tribunal accepted the addition of Rs. 10,000 as well. The additions having thus been made, proceedings were initiated u/s 271(1)(c) of the Income

Tax Act, 1961, to levy penalty on the assessee for such escapements and unaccounting of assessable income. The assessee reiterated the

contentions already made during the assessment proceedings. The assessee''s explanation before the Tribunal was that the purchases of stock

made by it were credit purchases and that, therefore there was no justification for the addition of Rs. 50,000. Regarding the other sum of Rs.

10,000 which is added, the same plea which was urged by the assessee before the assessing officer was repeated. The Tribunal, however, did not

countenance such reiteration of the submissions already made and upheld the penalty levied by the authorities consequent upon the discovery of the

non-inclusion of assessable income such as the sum of Rs. 50,000 and another sum of Rs. 10,000 already referred to. It observed that there was

concealment of income which necessitated the addition and in its consequence it attracted the penalty as well, in law. The Tribunal would not agree

with the explanation given by the assessee that in the matter of procurement of the cash for the purpose of purchase of stock or with the story that

this sum of Rs. 10,000 was made available by Mohamed Mohideen. In the result, therefore, the Tribunal sustained the levy of the penalty but

reduced it to a sum of Rs. 25,000 having regard to certain deletions made by it in the assessment order. At the request of the assessee, the

question mentioned above was referred to us.

Mr. Kareem, learned counsel for the assessee, says that the record does not disclose a finding to the effect that the assessee concealed or

deliberately concealed income, nor could it be reasonably inferred from the discussion in the orders of the Tribunals below that they applied their

mind independently about any overtness in the avoidance of tax. Reliance is placed upon State of Orissa Vs. Maharaja Shri B.P. Singh Deo, , in

which the Supreme Court laid down or reiterated the well-known principle that mere rejection of the explanation by an assessee in the course of

the assessment proceedings of the revenue would not automatically lead to the exercise of power to levy penalty. On the other hand,-counsel for

the revenue would say that even at the original stage the conduct of the assessee was discussed and additions were made only because of an

attempt to consciously conceal assessable income on the part of the assessee. Another contention is that as the Tribunal rested its conclusion on

appreciation of facts, no interference is called for by this court exercising jurisdiction u/s 66(1) of the Indian Income Tax Act, 1922, equal to

256(1) of the Income Tax Act of 1961, which is in the nature of advisory jurisdiction.

It is by now well settled that the scope of interference by the High Court on a reference ""under Section 256(1) of the Income Tax Act, 1961, is

rather restricted. It is undoubtedly advisory in the sense that it is not appellate. It is not even revisional as it is understood in civil law because

interference on the ground that there is a material irregularity in the order of the Tribunal is also sometimes not possible. One thing, however, is

certain that conclusions arrived at by the Tribunal based on assessment of the material on record have to be accepted by this court and the scope

of interference in such matters is very much limited. In cases where such conclusions or decisions are based on no evidence or on materials which

were not correctly or truly appreciated or in easel where the conclusions are such which a reasonable person would not have made on the

hypothesis presented, then in the exercise of its advisory jurisdiction, the High Court could interfere, but even then for certain limited purposes. No

such case has been made out by the assesses in the instant case.

Next we come to the periphery of power in penalty proceedings. The penalty proceedings in the tax law, though not equatable to a penal

proceeding in toto, are certainly in the exercise of quasi-penal power. If the proceeding is, therefore, quasi-penal, then the question which looms

large in such cases is on whom the burden of proof lies to bring home the offence so as to attract the penalty. All acts of concealment and such

other equatable actions on the part of the assessee do not come for criticism and for the exercise of such a penal power. It is only contumacious

conduct which is the resultant of a conscious and deliberate attempt to avoid assessable income which comes into computation for the purpose of

exercise of such a power to levy a penalty. Such power is generally exercised in the course of the assessment proceedings. But the only

conceivable distinction is that penalty proceedings begin when the assessment proceedings end. It is always, however, accepted that penalty

proceedings are in the stream of assessment activities of the revenue and, therefore, the burden of proof has always been accepted to be on the

shoulders of the revenue to establish even during the initial assessment proceedings that the case was one where the assessee should be brought to

book by further extending the assessment proceedings and leading it on to penalty proceedings. It is in this sense that the burden is cast on the

revenue to establish prima facie that there has been a conscious concealment and a deliberate avoidance resulting in a contumacious activity by the

assessee in the course of the proceeding. If on the record we have that much of material to prove such wantonness on the part of the assessee to

avoid tax and thus evade tax, then the assessing officers in the first instance would be justified in giving the clue for the exercise of the penal power

at a later stage by pointing out in their respective orders that there has been such a supine indifference on the part of the assessee to avoid tax.

It is, therefore, necessary for us to see in the instant case whether in the stream of assessment proceedings, the assessing officer did make the

position clear even at that stage that this is a case in which the assessment proceedings should not end as such, but the penalty proceedings should

begin as soon as the former ends. We have no hesitation in holding that in the instant case there is sufficient material for us to conclude that there

are findings of conscious concealment and deliberate avoidance of assessable income by the assessee.

In two cases the avoidance was discovered. The sum of Rs. 50,000 is the first item concealed. The Income Tax Officers well as the Appellate

Assistant Commissioner and finally the Tribunal found that the story of the assessee that it brought out this sum from its branch was unbelievable. If

the Tribunal had said that and left it at that, probably Mr. Kareem would be right in his contention that, the mere rejection of the explanation of the

assessee cannot be the foundation for initiating penalty proceedings or leaving it. But the case did not end there. The revenue at every stage found

that the story was not only wrong but was unacceptable. It appears to us also to be so. It is not conceivable for a branch office of the assessee''s

business to keep cash under independent accounts of its own but would not make a debit entry as against it if it was taken away by the principal

business for its purpose. Unless there is such a debit entry, the mere ipse dixit of the principal whenever it is convenient for it to do so that it utilised

the cash credit in the branch office was rightly rejected by the revenue and the Tribunal as an unacceptable story and an impossible commercial

activity.

As regards the addition of Rs. 10,000 for which the penalty was attracted, the case is that the assessee should have been given on opportunity

to cross-examine the deponent of the affidavit, Mohamed Mohideen. The contention also is that the department should have summoned him.

Though in penalty proceedings the burden is on the revenue to establish the penal activity of the assessee and bring it home before the concerned

statutory authorities, yet such burden is not to be understood in a liberal way so as to compel the department to summon the witness when the

assessee should have summoned him to further its contentions. The assessee''s case was that the deponent of the affidavit, Mohamed Mohideen,

provided Rs. 10,000. It was primarily its responsibility to establish the said contention by producing the deponent of the affidavit. No doubt it is

pleaded that he was ill for some time but that did not prevent the assessee from making a request at least before the Appellate Tribunal that it might

be given an opportunity to produce the deponent before the Tribunal or ask for such other similar relief. No such attempt has been made. Reliance

is placed upon Mehta Parikh and Co. v. Commissioner of Income Tax [1956] 30 ITR 181 . That was a case where the persons who gave the

affidavits were not cross-examined and there is no indication in the judgment to show that the department wanted the deponents to be cross-

examined, Having regard to the finding of fact in the assessment proceedings and the nature of the concealment which is the basis for the levy of

penalty, we are unable to agree with Mr. Kareem that there was no justification for the levy of penalty as made by the revenue and accepted by

the Tribunal. The reference is, therefore, answered against the assessee and the revenue will be entitled to its costs. Counsel''s fee Rs. 250.

T.C. No. 348 of 1970 relates to the assessment year 1959-60. Though four items of credit in the books of the assessee were involved we are

now concerned with only two sums which were added on to the assessable income. The first one is the sum of Rs. 5,750 which was a credit in the

name of A. K. Kadar All and another sum of Rs. 11,512.63 which related to the purchase of gold out of cash not accounted for. As regards the

sum of Rs. 5,750 the Tribunal considered the order of the Income Tax Officer and found that the entries in the books of account of the assessee

did not support the explanation given that a draft was brought by A. K. Kadar AH of Ceylon and it was in that connection the credit was made.

No particulars were given as to how the so-called draft was cashed and the source from which it was received, etc. No other evidence or

particulars were furnished by the assessee even during the penalty proceedings which we shall refer to hereafter. It was in these circumstances that

the credit was held to be fictitious one. The other amount of Rs. 11,512.63, which was the amount the Tribunal added as against the sum of Rs.

59,000 added by the Income Tax Officer, represented, according to the Tribunal, cash outside the books, utilised for the purchase of gold.

Factually, it is found that the assessee was unable to explain this credit in any reasonable manner. Consequent upon such an addition and in view of

the penalty proceedings taken later, the Tribunal confirmed the order of penalty levied u/s 271(1)(c). On a request made by the assessee the

question already excerpted above was referred for our decision.

We have already touched upon the essential features which would guide this court in exercising jurisdiction u/s 256 of the Income- tax Act,

1961, as also the scope of the penalty proceedings. Having regard to the fact that the findings of fact rendered by the Tribunal are based on

acceptable material and as it is generally not possible for this court in exercise of its advisory jurisdiction to probe further into such factual findings,

we are unable to interfere with the conclusions made. But what is urged by Mr. Kareem is that the observation of the Tribunal that no submissions

were made in regard to the other items taken by the Inspecting Assistant Commissioner for the purpose of levying the penalty is clearly not correct.

If really there was any such patent error in the order, as rightly suggested by the counsel for the revenue, the assessee would have sought for

rectification of the alleged error. No such attempt has been made. We have, therefore, to take it that no such submission was made in regard to the

other item. In view of our conclusion that the levy of the penalty is justified in law having regard to the facts of this case, the question is answered

against the assessee, but as these cases were both taken up together, there will be no costs in this reference.