Punjab Rice Mills vs Commissioner of Income Tax and Another

This income tax appeal under s. 260A of the IT Act, 1961, has been preferred on the following questions of law :

Whether upon the fact and In the circumstances of the case, the Tribunal was justified in holding that the surrender of the amount of Rs. 2 lakhs, which resulted due to the mistake of the accountant in the books of account was a case of concealment of particular of income ?

Whether upon the fact and in the circumstances of the case, the Tribunal was justified in holding that the surrender of Rs. 2 lakhs by the appellant to be added to its income as extra profit was not bonafide and was not to purchase peace and avoid litigation ?

Whether upon the fact and in the circumstances of the case, the Department had discharged its burden to prove concealment ?

Whether upon the fact and in the circumstances of the case, the Tribunal was justified in setting aside the order of the CIT(A) deleting the penalty imposed under s. 271(1)(c), on surmises and conjectures ?

Whether upon the fact and in the circumstances of the case, surrendering the amount resulting due to the mistake of the accountant to be added as extra profit can be termed as fraud, willful neglect and concealment within the meaning of s. 271(1)(c) of the Act ?

The assessee was a partnership concern with 14 partners pertaining to Banjara community. They were engaged in the business of running rice mill. For the asst. yr. 1992-93, they disclosed turnover of Rs. 56,57,959, giving a net profit of Rs. 70,837.

During the course of examination of the account books, the AO found that a cash receipt of Rs. 2,000 on 19th June, 1991 and payment of Rs. 2,000 on 20th June, 1991 were not entered in the cash book and were not posted in the ledger; cash receipt of Rs. 1,00,250 on 11th Oct., 1991 by bank draft by M/s Radhika Trading Company was entered In the cash book and was posted twice, once in the account of M/s Radhika Trading Company and other in the account of M/s Dinesh Chand Anuj Kumar, the Delhi based sister concern. The assessee could not explain the posting of the same amount at two places. On 21st Nov., 1994, a letter was filed by the assessee to explain that Rs. 1,00,250 received on 11th Oct., 1991, was rightly posted in the account of M/s Dinesh Chand Anuj Kumar. The AO found that an amount of Rs. 1,00,250 was wrongly posted in the account of M/s Radhika Trading Company, and added it to the income of the assessee, after turning down the explanation that the posting was made In the account of M/s Radhika Trading Company against the same receipt and against the payment of Rs. 1 lakh made by them on 21st Jan., 1992. In the bank account, no deposit of Rs. 1 lakh appeared on 21st Jan., 1992. The AO observed that the assessee had fraudulently reduced the liability.

The AO further found that cash receipt of Rs. 88,000 of M/s Radhika Trading Company, paid on 11th Oct., 1991, was not entered in the books of account of the assessee nor sale of Rs. 91,174.55 made to them on 9th Dec, 1991 appeared in the accounts of M/s Radhika Trading Company in the assessee''s books. The assessee explained that the rice of Rs. 1,176.55 was sold, but the sale was cancelled and the goods were further sold to M/s Radhika Trading Company. These sales were wrongly posted in the account of M/s Vishnu Traders, Delhi.

The AO found that there were double entries on different accounts in the ledger and observed, after making note of these entries that the maintenance of account books is totally unreliable. Looking into the net profit declared by other rice millers, which was at a higher rate, he proposed additions, totalling Rs. 2,20,912. On 24th Nov., 1994, Sri Mohd. Ishtiaq, partner of the assessee gave in writing through a letter, surrendering the net profit of Rs. 2 lakhs to be added to the income, provided the claim of deductions under ss. 80HH and 80-1, is allowed from the total profit. The AO accepted the offer and added it to the Income, calculating the profit at Rs. 2,20.912. After giving the benefit of deductions of ss. 80HH and 80-1, the total income was found at Rs. 1,74,338, in which, the shares of the 15 partners at the rate from 4 per cent to 9 per cent, was calculated. The profit share of the partners ranged between Rs. 7,514 to Rs. 13,525. The AO also directed to issue notice under s. 271(1)(c) for concealment of entries. The CIT(A) found that the penalty levied by the ITX) is misconceived and cancelled the same on the following reasons :

In appeal before the first appellate authority, the submissions made before the AO were reiterated. It was contended that the assessee firm has 15 partners and all of them were uneducated having no knowledge of accounts. It was further contended that the partners were from the Banjara community. It was further contended that the Munim had committed certain mistakes while totalling up the various heads of expenses as well as various pages of account books and not recorded certain transactions for purchase and sale and if both are adjusted, there remains no difference. Similarly, it was contended that the valuation of the closing stock is defective and it does not call for imposition of penalty. Thus, on account of the fact that there was no intention on account of the partners, an amount of Rs. 2 lakhs was surrendered. It was further contended that the partners were so gullible that they did not file an appeal against the assessment order which proved their innocence. It was further contended that even if the addition was warranted for tax purposes, the addition would not justify the levy of penalty. Considering these submissions, the CIT(A) came to the following conclusion :

I have carefully considered the submission of the counsel. I have further perused the facts as recorded by the AO in his penalty order. It is apparent that the mistake detected by the ITO Is nothing but mistake of accountant and partners have no knowledge of the said mistakes, the partners had surrendered the said amount. They were so innocent that even appeal against the said addition was not filed when they believed in the oral assurance of the ITO. Certain expenses for purchasing etc. remained unrecorded and so were certain receipts of sales etc. If those were adjusted, there would be no concealment. Similarly, concealment penalty cannot be imposed on the facts of change of method of valuation of closing stock. In view of all above, I am convinced that the penalty levied by the ITO is misconceived. I accordingly cancel the same. The appeal is allowed.

in the appeal filed by the Revenue, it was contended that since the assessee had himself surrendered Rs. 2 lakhs when he was confronted with Irregularities and has not filed any appeal, the penal provisions under s. 271(1)(c), are attracted. Relying upon K.P. Madhusudhanan vs. CIT (2001) 169 Cm (SC) 489 : (2001) 251 FIR 99 (SC), the Tribunal allowed the appeal.

Sri Shakeel Ahmad, learned counsel for the appellant, submits that unless there is a mala fide attempt of concealment, the penalty is not attracted. The assessee surrendered Rs. 2 lakhs after the explanation given by their counsel regarding discrepancy in the accounts, was not accepted. The additions were not by way of any concealment of income as an attempt to evade the tax. These were by way of bona fide mistakes which were sought to be explained, but since they were not accepted, the assessee bonafidely surrendered Rs. 2 lakhs and he did not file any appeal, in which circumstance, the provisions of s. 271(1)(c) were not attracted. The Tribunal erred in law in allowing the appeal. He has relied upon the judgment in Commissioner of Income Tax Vs. Suresh Chandra Mittal, in which it was held that where the Department had not discharged the burden of proving concealment and had simply rested its conclusion on the act of voluntary surrender done by the assessee in good faith, the penalty could not be levied. Sri Shakeel Ahmad has also relied upon Sir Shadi Lal Sugar & General Mills Ltd. & Anr. vs. CTT (1987) 64 CTR (SC) 199 : (1987) 168YTR705 (SC), in which in an almost similar circumstance, the assessee had agreed to the additions of his income and did not file any appeal. The Supreme Court held that the circumstances did not follow that the amount agreed to be added was concealed income. The Supreme Court observed that there may be many reasons for such admission, i.e. when the assessee realises the true position, it does not dispute certain disallowances, but that does not absolve the Revenue from proving the mens rea of quasi-criminal offence.

Sri A.N. Mahajan appearing for the Department, has relied upon the Explanation of s. 271(1)(c) and the provisions of s. 271(1)(c) of the IT Act, 1961. He submits that in Union of India (UOI) and Others Vs. Dharamendra Textile Processors and Others, , it was held by the Supreme Court, disagreeing with the case Dilip N. Shroff Karta of N.D. Shroff Vs. Joint Commissioner of Income Tax, Special Range Mumbai and Another, , that the Explanations appended to s. 271(1)(c) of the IT Act indicate the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing the return. The judgment in Dilip N. Shroffs case (supra), did not consider the effect and relevance of s. 276C of the IT Act. The object behind the enactment of s. 271(1)(c) read with the Explanations, indicate that the said section has been enacted to provide for a remedy for loss of revenue. The penalty under that provision is a civil liability. Willful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution under s. 276C of the IT Act.

In the present case, the AO has not recorded any finding that the assessee willfully attempted to conceal the income. The entire accounts were placed before the AO who did not discover any incriminating material on the basis of which he could draw a conclusion that the assessee had deliberately concealed the income. During the course of assessment the AO did not accept certain entries in the books of account on which the assessee voluntarily surrendered Rs. 2 lakhs. The appellate authority also considered the circumstances that the Arm had 16 partners who were uneducated and belonged to Banjara community. They were carrying on business in a partnership concern and did not have detailed knowledge of the accounts. They acted bona fidely in surrender of the amount of Rs. 2 lakhs which was recorded in their account books, but could not be sufficiently explained. This bonafide act could not be treated as concealment of particulars of income, or furnishing inaccurate particulars of income.

In Dharamendra Textile Processors (supra), the Supreme Court considered the question of penalty under s. 11AC of the Central Excise Act. In The Chairman, SEBI Vs. Shriram Mutual Fund and Another, , the Supreme Court had considered the scheme of penalty in SEBI (Mutual Funds) Regulations, 1996. It was held that Dilip N. Shroff vs. Jt. CIT (supra), was not correctly decided, as in it, the Court lost sight of difference between s. 271(1)(c) and s. 276C (providing for prosecution), of the IT Act. It was held that the object behind the enactment of s. 271(1)(c) read with its Explanations indicate that the said section has been enacted to provide for a remedy for loss of revenue. The penalty under that provision is a civil liability. Willful concealment is not an essential ingredient for attracting civil liability as in the case in the matter of prosecution under s. 276C of the IT Act.

Explanation 1 to s. 271(1)(c) is in two parts. Part (A) is attracted where a person fails to offer an explanation or an explanation is found by AO or CIT(A) to be false. Part (B) is attracted when a person offers an explanation which he is not able to substantiate, and fails to prove that such explanation is bonafide and that all the facts relating to the same and material to the computation of his total income, have been disclosed by him.

In the present case, Part (B) of Expln. 1 has been called to aid to impose penalty, without the explanation offered, and which was not accepted by the AO, was not found to be lacking in bonafides. Further, there is no finding that all the facts and material to the computation of total income were not disclosed. Explanations 2 to 5 are not applicable to the facts of the case.

In the circumstances, we decide the questions of law in favour of the assessee and against the Revenue. The income tax appeal is allowed and order of Tribunal dt. 29th Oct., 2002 is set aside. The proceedings of penalty, if they have been drawn, shall be dropped.