1. This is an appeal by the assessee against the order of the Commissioner (Appeals) upholding levy of penalty of Rs. 68,638 under Section 271(1)(c) of the Income-tax Act, 1961 ('the Act').
2. In brief, the facts are that the firm in its return for the assessment year 1972-73 claimed deduction of Rs. 1,36,000 representing interest credited to the account of Prabhudayal Surajbhan of Indore. It is an admitted case that two of the four partners of the assessee-firrn were partners of Prabhudayal Surajbhan. During the course of assessment proceedings the ITO found that deduction of Rs. 1,36,000 was very excessive and, therefore, he called upon the assessee to furnish the basis of the above deduction. Statements of one of the partners as well that of the accountant of the firm were also recorded by the ITO. On proper calculations, the ITO held that only a sum of Rs. 56,132 should be allowed as a deduction and the balance is to be treated as income of the assessee. On further appeal, certain reliefs were allowed to the assessee and ultimately addition of Rs. 68,638 was retained. After initiating penalty proceedings under Section 271(l)(c) the ITO levied penalty under the above provisions vide order dated 31-3-1980 but the said order was set aside by the Commissioner under Section 263 of the Act vide his order dated 1-9-1981. The Commissioner as per the above order, directed the ITO to pass a fresh order in accordance with law.
The ITO passed a fresh order on 14-12-1981 levying penalty of Rs. 68,638 under Section 271(l)(c) with the prior approval of the IAC.3. Aggrieved by the above order, the assessee filed an appeal before the Commissioner (Appeals) and challenged the order imposing the penalty on the following three grounds : (i) That the order dated 14-12-1981 levying penalty was beyond the period of limitation prescribed under the Act and was, therefore, illegal.
(ii)That as per the assessment order dated 22-3-1975, the matter of imposing penalty was referred to the IAC who in accordance with the existing law had the jurisdiction to levy penalty and, therefore, the order dated 14-12-1981 of the ITO was without jurisdiction.
(Hi) That the assessee was neither guilty of concealment of income nor furnishing of any inaccurate particulars of income and, therefore, the order imposing penalty under Section 271(1)(c) was bad in law.
4. The Commissioner (Appeals) in order under appeal, rejected all the three objections and confirmed the order of the ITO levying penalty and dismissed the appeal of the assessee. Aggrieved, the assessee has come before us.
5. Before us the learned counsel for the assessee raised the same objections as were raised before the Commissioner (Appeals), the learned departmental representative on the other hand, supported the order of the ITO and the Commissioner (Appeals) and argued that the levy of penalty is fully justified.
6. We have heard the parties and examined the record produced before us. As far as the first objection of the appellant is concerned, it was argued by the counsel for the assessee that limitation is to be reckoned from the date of order of assessment, i.e., from 22-3-1975 and when counted from that date the order passed by the ITO on 14-12-1981 was clearly barred by time prescribed under Section 275 of the Act. He placed reliance on the decisions of the Madhya Pradesh High Court in the cases of Addl. CIT v. Nandkishore [1983], 143 ITR 182, CWT v.Chandmal Surajmal [1983] 143 ITR 178 and CIT v. Ramprakash Saraf 13 ITC 539. According to the counsel for the assessee all the above authorities support the proposition that when reference was once made to the IAC, the IAC continued to have the jurisdiction in the case and, therefore, the ITO had no jurisdiction to impose penalty in spite of the change in law with effect from 1-4-1976. We agree with the proposition that when once a valid reference is made to the IAC, subsequent change in law shall not affect his jurisdiction to impose penalty. However, in the case in hand, as rightly pointed out by the learned departmental representative, only a direction to make reference to the IAC was given on 22-3-1975 when penalty proceedings were initiated but in fact no reference was made to the IAC. The IAC never assumed jurisdiction of the matter nor he issued any notice to the appellant. Before the reference could be made the law was changed and jurisdiction to impose penalty was vested with the ITO with effect from 1-4-1976. Even the first order imposing the penalty dated 31-3-1980 was passed by the ITO. The learned counsel could not show us any material except to the IAC (sic). Admittedly, no notice from the IAC was received by the assessee. Reference 'under Sub-section (2) of Section 274 of the income-tax Act' means assumption of power by the IAC to impose penalty.
The ITO cannot do it unilaterally. In these circumstances, it is not possible for us to hold that any reference was made to the IAC by the ITO on 22-3-1975. Assuming for the sake of argument that such a reference was made to the IAC, in view of the amendment of the provisions with effect from 1-4-1976, vesting the jurisdiction with the ITO, the IAC could send the matter back to the ITO and the ITO was fully competent to impose the penalty. Decisions of the Madhya Pradesh High Court cited by the learned authorised representative of the assessee in fact go against the assessee. In the case of Ramprakash Saraf (supra), his Lordship held as follows : The plain language of the proviso to Sub-clause (iii) of Clause (c) of Sub-section (1) of Section 271 indicates that the point of time indicated thereby is the time when the order imposing penalty has to be made and not the time of initiation of penalty proceedings.
In above case other decisions cited by the counsel have also been considered. In that case reference made to the IAC on 15-7-1977 was held to be bad in law. In these circumstances, the order of the ITO imposing penalty cannot be held to be without jurisdiction. 7. Apart from the above facts, it has to be noted that the first order dated 31-3-1980 imposing penalty passed by the ITO was revised and set aside by the Commissioner under Section 263 on 1-9-1981 with specific directions to the ITO to pass a fresh order with the approval of the IAC after affording a reasonable opportunity of being heard to the assessee. The said directions of the Commissioner were challenged by the assessee in appeal before the Tribunal but the Tribunal vide its order dated 20-12-1982 in IT Appeal No. 921 upheld the order of the Commissioner. The order of the Tribunal has become final. The order dated 14-12-1981 was passed in compliance with the order of the Commissioner. It cannot be argued that even after the passing of the order under Section 263, i.e., after 1-9-1981, the ITO was still required to refer the case to the IAC and had no jurisdiction to impose penalty. We, therefore, find no force in the first objection of the counsel for the appellant.
8. As regards the Second objection that the order passed by the IAC was beyond the period of limitation. It is to be noted that one of the objections taken by the assessee before the Tribunal against the order of the Commissioner under Section 263 was that period of limitation had already expired and, therefore, the Commissioner could not issue directions to the ITO to impose penalty. The above said contention of the assessee was rejected by the Tribunal as per the discussion in paragraph 13 of the order. The said order as already stated has become final and, therefore, the above question stands finally determined against the assessee. In the order under appeal, the Commissioner has also held that period of limitation applies only to the initial order of penalty and not to an order passed with reference to the directions of the higher authorities like the one given by the Commissioner under Section 263 in the instant case. He relied upon two cases in Director of Inspection of Income-tax (Investigation) v. Pooran Mall & Sons [1974] 96 ITR 390 (SC) and Vasani & Co. v.CIT [1978] 112 ITR 819 (Guj.). Before us the learned authorised representative also relied upon decision of the Cuttack Bench of the Tribunal in the case of ITO v. S.S. 10 ITC 200 (sic). In the said case the Bench took the view that on the wording of Section 251(1)(b) of the Act the Commissioner (Appeals) have no power to set aside a penalty order. The above decision has no application in the case in hand. Here the penalty order was set aside by the Commissioner under Section 263 and the said order was affirmed by the Tribunal. We entirely agree with the reasoning given by the Commissioner (Appeals) and find no merit in the contention of the appellant that the order passed by the ITO is barred by period of limitation.
9. Coming to the merits of the penalty imposed, the counsel vehemently argued that it was a case of mere disallowance of claim of interest and, therefore, it cannot be said that the assessee concealed particulars of income or furnished any inaccurate particulars of income. It is nobody's case that any false deduction was claimed by the assessee in the return or that lesser than Rs. 1,36,000 was actually paid by the assessee. The learned counsel further argued that the assessee was in fact in need of money and, therefore, it suited him to take loan at higher rate of interest. It was further pointed out that the assessee-concerned showed a total turnover of about Rs. 90 lakhs when its own capital was only Rs. 1 lakh. To reach the above turnover it had no choice but to borrow capital at the dictated terms of the lender. Because of limited capital of its own the assessee-firm was not able to raise loans from banks and was compelled to take loan from sister-concern, Prabhudayal Surajbhan. It was further argued that interest had been disallowed under Section 40A(2) of the Act as the income-tax authorities considered the rate to be excessive or unreasonable. But as to what is reasonable is a matter of subjective opinion and when the assessee on the facts and in the circumstances of the case considered the payment of interest at a particular rate as reasonable, no question of any concealment of income was involved. In these circumstances no charge of concealment has been proved against the assessee.
10. We have very carefully considered all the above arguments of the learned counsel for the assessee but find no force in them. While upholding the addition in this case, the Tribunal considered at length all the arguments but rejected them and upheld the addition of Rs. 68,638. Out of the total claim of Rs. 1,41,384 a sum of Rs. 1,36,000 was claimed in the account of Prabhudayal Surajbhan whereas the other lenders were being paid interest at the rate not exceeding 12 per cent, the sister-concern, Prabhudayal Surajbhan comprising of two of the four partners of the assessee-firm, were paid interest at the rate of about 36 per cent per annum. When called upon to furnish the basis for claim of such exorbitant deduction of Rs. 1,36,000, the partner of the assessee-firm could not furnish any basis or justification for the above claim. In fact the partner and the accountant stated that agreed rate for payment of interest was 1-1/4 per cent per month and when worked out on that basis as per the kat-miti system of accounting it worked out to Rs. 56,132. The ITO then specifically asked them as to why against Rs. 56,132, Rs. 1,36,000 had been claimed. No plausible answer was given except that perhaps there was some mistake. In its order dated 14-12-1981, the ITO had reproduced part of the statements recorded by him. It is seen from the record that the sister-concern, Prabhudayal Surajbhan, even after showing receipt of Rs. 1,36,000 had no taxable income. The claim of the assessee that payment of interest to the sister-concern did not make any difference was specifically rejected by the Tribunal in IT Appeal Nos. 161 and 503 and it held that the assessee had tried to save firm's tax liability. The other contentions raised before us justifying the payment of interest as a measure of business expediency were also rejected by the Tribunal. It is pertinent to note that after admitting before the ITO that rate of interest was to be calculated at 1-1/4 per cent per month and that there was some mistake in the calculation at Rs. 1,36,000, the assessee never tried to correct the mistake or explain the circumstances under which the interest was inadvertently credited. On the contrary before the higher authorities it went on to place that payment of interest at the abovesaid exorbitant rate was justified. We do not agree with the learned representative of the assessee that the claim of the assessee has been disallowed only due to subjective opinion under Section 40A(2). In our opinion, it is a clear case of diversion of income to save tax liability. There are two more significant facts showing that an attempt to conceal the income was made by the assessee. First is that the rate at which the interest was calculated was not shown in the books of account in the case of Prabhudayal Surajbhan. Secondly, in the certificate furnished to Prabhudayal Surajbhan under Section 194C of the Act the rate of interest paid was not been mentioned at all. In the circumstances the sister-concern was not to pay and in fact did not pay any tax on the interest of Rs. 1,36,000 credited in its account. This also shows that a clear attempt was made by the assessee to reduce its tax liability. Assessment in this case was completed on 22-3-1975 and, therefore, the Explanation to Section 271(1)(c) which was amended with effect from 1-4-1976 was not applicable to the case. Therefore, the onus to show that failure to show the correct income was not due to any gross or wilful neglect, was on the part of the assessee which, according to us, has not been discharged. In our considered opinion it was a fit case where penalty under Section 27l(1)(c) was imposed and we are not inclined to interfere with the order passed by the authorities below.