1. This appeal by the assessee is directed against the order in revision passed by the Commissioner of Income-tax Madurai, on 25-3-1991.
2. The assessee, an individual, is running a tailoring establishment at Madurai. The assessment year is 1983-84, the year of account ending on 31-3-1983 being the relevant previous year. For the said assessment year, the assessee had, on 29-8-1984, filed his return of income disclosing a total income of Rs. 38,680 as detailed below: 3. On 5-10-1982, the Department had conducted search and seizure operations, in the course of which the Department discovered and seized several Order Books, Daily Collection Chittai and Day Books, revealing the full extent of the assessee's income. Certain investments in certain properties, both movable and immovable, also came to light.
4. In the course of the assessment proceedings for the assessment year 1983-84, the Assessing Officer naturally used the seized material as the starting point for making inquiries. On a close study of the seized material, the Assessing Officer found that the assessee was maintaining Order Books for the orders executed. The daily collections are first recorded in the Daily Collection Chittai. Thereafter, the entries in the Chittai are taken to the Day Book and the Ledger.
The Assessing Officer further found that the assessee had omitted to record the daily collections in the Chittai and consequently in the Day Book and the Ledger. The details of the extent of the collections omitted to be recorded are given below :A/c Assl. Yr.
Period for which No. of No. of OmissionYear both the order orders orders in book and chittai execut- omitted rupees were made availa- ed1979-80 1980-81 18-5-1979 to 25-9-1979 3600 385 13,542 5-4-1980 to 24-4-19801980-81 1981-82 4-9-1980 to 3-2-1981 8954 2558 91,854 19-2-1981 to 31-3-1981 5. Finding that the assessee was systematically omitting to record part of the Daily collections, the Assessing Officer called upon the assessee to produce the Order Books, and Daily Collection Chittai relating to the year of account ending 31-3-1983 (being the previous year relevant to the assessment year 1983-84 which is now before us).
The assessee responded by contending that he had destroyed the said books. The assessee, however, admitted that collections aggregating to Rs. 1 lakh were omitted to be included in the Day Book and Ledger. It was the assessee's case that the income attributable to such omission would work out to 40%, i.e., Rs. 40,000. Further, an allowance of 6% for "non-delivery of orders" was also required to be given. Thus, according to the assessee, a sum of Rs. 28,936 was omitted to be disclosed in the return originally filed by him. In this regard, the assessee made another point also; and that related to the investments made by him during the relevant previous year. According to him, he had invested an aggregate sum of Rs. 33,525 on the following items: Against the said figure of Rs. 33,525, the assessee claimed set off of Rs. 2,204 being the net rental income available with him, and Rs. 28,936 being the undisclosed income from the tailoring establishment.
Thus, according to the assessee, the unexplained investment in the said items worked out to Rs. 2,385. He also offered the said amount for taxation. This he did by way of a revised return filed on 27-1-1986.
6. The contentions urged by the assessee as respects the revised return of income filed by him did not find favour with the Assessing Officer.
As respects the daily collections omitted to be included, the Assessing Officer, going on the basis of the extent of omission disclosed by the seized Order Books, etc. relating to the immediately three preceding assessment years, estimated the omission in collections at Rs. 3,50,000 7. Secondly, the Assessing Officer did not consider it necessary to give any allowance in respect of the expenditure incurred by the assessee because, according to the Assessing Officer, the expenditure incurred by the assessee had already been entered in the books of accounts maintained by him for production before the Assessing Officer.(i) Tailoring machines Rs. 5,531(ii) Jewellery: (b) Wife and children Rs. 19,602.
Rs. 31,914(iii) The Kalyana Mandapam Rs. 91,800(iv) Tallakulam property Rs. 1,66,000(v) Bajaj scooter Rs. 8,900(vi) TVS Moped Rs. 4,500(vii) Ariyur Land Rs. 8,380(viii)Unexplained deposits in Bank A/c Rs. 40,463(ix) Unexplained cash credits Rs. 25,000(x) Interest on unexplained cash credits Rs. 3,500(xi) Unexplained cash 9. On his part, the CIT(A), on a detailed examination of the matter, sustained additions to the extent indicated below : tailoring establishment Rs. 2,43,161(ii) Undisclosed investments: (a) Tailoring machines Rs. 3,032 (b) Jewellery Rs. 31,914 (c) Kalyana Mandaparn Rs. 91,800 (d) Tallakulam property Rs. 1,66,000 (e) Unexplained cash credits Rs. 25,000 (f) Unexplained cash 10. Thereafter, the assessee moved the Tribunal which, after getting a Remand Report from the Assessing Officer, sustained the additions to the extent detailed below : tailoring establishment Rs. 1,43,436 In the process, (a) Tailoring machines Rs. 3,032 (b) Jewellery Rs. 19,602 (c) Kalayana Mandapam Rs. 61,800 (d) Tallakulam property Rs. 38,000 (e) Unexplained cash credits Rs. 25,000 (f) Unexplained cash credits It may here be highlighted that after holding that the additions to the extent indicated above needed to be sustained, the Tribunal went on to consider the assessee's plea that "a set off should be given against these additions, of amounts added in respect of turnover outside the books for which cash would have been available to the assessee". Taking into account the extent of the daily collections omitted to be included and taking into account the further fact that some part of the assessee's personal expenditure would have been met out of the said unrecorded collections, the Tribunal held that it would be reasonable to give a set off to the extent of Rs. 1,25,000. Thus, it limited the addition to be made on account of unexplained investments etc. to Rs. 23,094. This was, of course, over and above the sum of Rs. 1,43,437, being the undisclosed income from the tailoring establishment, sustained by the ITAT.11. The net result of the appellate proceedings relating to the quantum appeal was that as against the sum of Rs. 74,290 returned by the assessee, the assessee's income came to be determined at Rs. 2,26,050.
12. In the course of the assessment proceedings, the Assessing Officer had initiated penalty proceedings under Section 271(1)(c) of the Act and had called upon the assessee to show cause why penalty under the said Section should^ not be levied. And on 16-2-1989, the Assessing Officer closed the penalty proceedings observing: The assessee's representative, Shri A. Satyamurthy, Advocate, appears and explains. Taking into account the written reply filed and also the explanation offered, penalty under Section 271(1)(c) is dropped.
13. Subsequently, the Commissioner of Income-tax, Madurai, invoking the powers vested in him by and under Section 263 of the Income-tax Act, 1961, called for and examined the records of the assessee. On such an examination, he found that the aforesaid order dated 16-2-1989 of the Assessing Officer, dropping the proceedings under Section 271(1)(c), was erroneous in that it was prejudicial to the interests of the revenue. In this regard, he was impelled by the consideration that in the face of the finding of definite suppression of tailoring charges, the dropping of the proceedings under Section 271 (1)(c) was unwarranted and hence prejudicial to the interests of the revenue. He, therefore, put the assessee on notice of his intention to pass a suitable order in revision under Section 263 of the Act.
14. The assessee responded by making the following points: Preliminary objections: (i) The order dropping the penalty proceedings was not communicated to the assessee. There was, therefore, no effective order in strict sense so as to enable the CIT to invoke the provisions of Section 263 of the Act - See the M.P. case of Smt. Jijeehai Shinde v. CGT [1986] 157 ITR 122.
(ii) The assessment order having been passed on 24-3-1986, the period of limitation for passing a penalty order expired on 28-2-1989. Therefore, even if the CIT were to pass an order in revision under Section 263 the Assessing Officer could not properly pass a penalty order. Thus the proceedings under Section 263 are infructuous.
(i) There are certain factual errors in the notice issued to the assessee under Section 263 of the Act.
(ii) The revised return was filed under the Amnesty Scheme. Hence no penalty is exigible under Section 271 (1)(c) of the Act. Reliance in this regard was placed on the answer to question No. 30 contained in the CBDT Circular No. 451 of 17-2-1986.
(iii) The assessee could not be said to have concealed his income because even the addition of Rs. 2,43,161 sustained by the CIT(A) on account of unaccounted income from tailoring establishment came to be computed "on accounting of willing cooperation and efforts of the assessee". What was more, mens rea was an essential ingredient of Section 271(1)(c) at the relevant point of time. The legal position as amended with effect from 10-9-1986 had no application to the assessee's case.
(iv) Even the additions as ultimately sustained by the ITAT were nothing but an estimate and it is well-settled that no penalty is exigible in cases where additions are made on estimate basis.
(v) The case was governed by Explanation KB) to Section 271(1) as it stood prior to the amendment with effect from 10-9-1986. And according to the pre-amendment provision, no penalty was exigible.
(vi) Penalty proceedings, it is well-settled are different from assessment proceedings; and consequently, the findings in assessment proceedings cannot conclude matters relating to penalty against the assessee.
(a) As for the contention that the order dropping the penalty proceedings not having been communicated to the assessee, there was no effective order which could be the subject-matter of revision under Section 263: this contention, it would appear, was withdrawn at the time of the hearing before the CIT. Even so, the CIT took note of the fact that the assessee was aware of the fact that the penalty proceedings have been dropped. This would be clear from the communication dated 31-3-1989 from Shri K.L. Tilakchand, the senior Authorised Representative, ITAT, Madras.
(b) The argument based on limitation was also not acceptable in view of the settled legal position that limitation prescribed under Section 275 applies only to the initial orders of the authority which imposes penalty and not to a fresh order passed on remand. In this regard, the CIT referred to and relied upon (a) the Supreme Court case of CIT v. National Taj Traders [1980] 121 ITR 535 and (b) the Gujarat cases of Vasani& Co. v. CIT[1978] 112 ITR 819 and CIT v. Vakharia Cotton Traders [1986] 161 ITR 441.
(c) The factual errors in the notice issued under Section 263 were not fatal to the assumption of jurisdiction under Section 263 of the Act.
(d) Amnesty Scheme : The contention that the return was filed under the Amnesty Scheme could not be accepted. Question No. 30 and the answer thereto contained in the Board's Circular No. 451 of 17-2-1986 makes it clear that an assessee could make a declaration in respect of assets/ incomes which are not the subject-matter of seizure, only if the concealment thereof had not been already found out in the course of the search. Further, reply to question No. 12 makes it clear that no immunity can be given by the Circular or availed of by the assessee whose premises have been searched by the Income-tax authorites.
In this regard, the CIT negatived the assessee's contention that the CBDT Circular No. 441 of 15-11-1985 did not contain any embargo on the assessee's filing returns under the Amnesty Scheme even in such cases. In this regard, the CIT took the line that having chosen to rely on the answer to question No. 30 of the CBDT Circular No. 451 of 17-2-1986, the assessee could not shut out the answer to question No. 12 of the same Circular.
In any event, the spirit of the Circulars issued by the Board in the context of the Amnesty Scheme was that in such cases, no immunity from penalty could be given particularly when concealment of income had been detected during the search.
(e) The CIT rejected the assessee's contention that penalty could not be levied because the income came to be determined on an estimate basis. In this regard, he was impelled by the consideration first that the assessee had clearly failed to account for tailoring charges in their entirety. There was also the unexplained investment in the properties, both movable and immovable. This being the position, the assessee cannot escape the penal consequences merely because for quantifying the concealed income, the Assessing Officer had to resort to an estimate. In this regard, he referred to and relied upon more than half a dozen cases, starting from CST v. H.M. Esufali, H.M. Abdulali [1973] 90 ITR 271 (SC) and ending with the Madras case of CIT v. E.V. Rajan [1985] 151 ITR 189 (Mad.).
(f) In this case, suppression of tailoring charges and unexplained investments in properties were detected during the search. Hence, penalty under Section 271(1)(c) was clearly exigible. Consequently, the Assessing Officer could not have lawfully dropped the penalty proceedings which had earlier been initiated under Section 271(1)(c) of the Act. It should, therefore, follow that recourse to Section 263 of the Act is available to the CIT, In view of the foregoing, therefore, the CIT passed the impugned order in revision, cancelling the order dropping the penalty proceedings and directing the Assessing Officer to make a fresh order after taking into account all the materials available on record and after making further enquiries, if necessary, and after giving the assessee a reasonable opportunity of being heard.
17. Shri J. Rama Iyer, the learned counsel for the assessee, took us through the facts and circumstances of the case and contended that on the facts and in the circumstances of the case, the CIT was not justified in passing the impugned order in revision. In this regard, he made the following points: (a) In this case, the Assessing Officer had made a noting on the Order Sheet dropping the penalty proceedings. Such a noting cannot be regarded as an order so as to give the CIT access to Section 263 of the Act. The Calcutta case of Christian Mica Industries Ltd. (120 ITR 627) cannot avail the Department because the question whether a minute recorded by the Assessing Officer to the effect that the proceedings are dropped will constitute an order within the meaning of Section 263 of the Act was not an issue. Similarly, the Allahabad case of Ramlal Kishore Lal v. CIT[1972] 84 ITR 138, cannot avail the Department, because there the Court was concerned with the directions given by the IAC under Section 274(2) of the Act.
According to Shri Rama Iyer, the Supreme Court case of CIT v. Bidhu Bhusan Sarkar [1967] 63 ITR 278 would clearly apply to the facts of the case before us. In that case, it was held that when the Assessing Officer wrote: 'The case is, therefore, filed", it only meant that the proceedings before him should be terminated or dropped. It was not necessary for the Assessing Officer to pass an order of assessment. According to Shri Rama Iyer, the said case is authority for the proposition that the mere dropping of proceedings cannot be equated with the passing of an order. It should, therefore, follow that in the case before us, the noting made by the Assessing Officer to the effect that the proceedings are dropped was not an order and that consequently, the provisions of Section 263 cannot avail the CIT. (b) Whether the proceedings initiated earlier must be dropped or continued is a matter which is within the discretion of the authority concerned. In the case before us, being satisfied with the explanations tendered on behalf of the assessee in the course of the proceedings, the Assessing Officer dropped the penalty proceedings.
In the circumstances, therefore, as long as there is no mala fide, the revisionary powers of the Commissioner could not be invoked. In this regard, Shri Rama Iyer relied on the observations made by the Madras High Court on page 138 of the report in the case of Venkatakrishna Rice Co. v. CIT[1987] 163 ITR 129.
(c) Section 275 of the Act clearly prescribes periods of limitation for passing various orders. The said periods of limitation cannot be extended by taking recourse to Section 263 of the Act. In this case, the time limit for passing a penalty order under Section 271(1)(c) expired on 28-2-1989. The impugned order in revision was passed on 29-3-1991. Since the period of limitation prescribed by and under Section 275 cannot be extended, the impugned order in revision is in fact infructuous.
Further, as already contended, a noting to the effect that penalty proceedings are dropped could not be regarded as an order imposing penalty. In this case, an order imposing penalty was not passed.
This is yet another reason why the CIT cannot extend the period of limitation by taking recourse to Section 263 of the Act.
(d) The revised return in question was filed under the Amnesty Scheme; and under that scheme, immunity was granted from penalty and prosecution. It should, therefore, follow that the minute recorded by the Assessing Officer to the effect that the penalty proceedings be dropped could not be regarded as being prejudicial to the interests of the revenue. In this regard, Shri Rama Iyer reiterated the arguments based on the CBDT Circular Nos. 451 of 17-2-1986 and 441 of 15-11-1985, referred to above, which had earlier been unsuccessfully advanced before the CIT. (e) Shri Rama Iyer then contended that in the ultimate analysis, the assessee's income came to be estimated and hence there was no question of levying penalty. In this regard, he referred to and relied upon the following cases:K. P. Kandasami Mudaliar & Sons v. CIT In this regard, Shri Rama Iyer reiterated the contention that no penalty is exigible even according to Explanation 1(B) to Section 271(1), before its amendment with effect from 10-9-1986.
18. In view of the foregoing, therefore, contended Shri Rama Iyer, the assessee is entitled to succeed.
19. On his part, Shri C.V. Rajan, the learned Counsel for the Department, strongly supported the impugned order in revision. He contended first that the power to levy penalty includes the power not to levy penalty, and that, consequently, a noting to the effect that the penalty proceedings are dropped is very much an order, which was amenable to revision under Section 263 of the Act. In this regard, he highlighted the fact that there have been cases in which the proceedings initiated by the Assessing Officer under the various provisions of the Act had been dropped by him; and that in those cases, the Courts have uniformly held that a minute dropping particular proceedings is tantamount to an order properly so called. In this regard, he referred to and relied upon the following cases : ITR 539 (SC) - Assessments closed with the [1979] 120 ITR 627 (Cal.) - Proceedings under Section 23A(1) of 62 ITR 678 (Mad.) - "Returns closed N.A." Mehta [1972] 83 ITR 502 (Punj. & Har.) - "Assessment pro- ceedings filed".
In this regard, Shri Raj an contended that the Supreme Court case of Bidhu Bhusan Sarkar (supra) referred to and relied upon by the learned counsel for the assessee, was distinguishable.
20. In view of the foregoing, therefore, contended Shri Rajan, the Commissioner was justified in invoking the revisionary powers vested in him by and under Section 263 of the Act.
21. Shri Rajan then contended that the bar of limitation prescribed by and under Section 275 of the Act is applicable only to the initial orders passed by the Officer concerned, and not to orders passed in compliance with the orders passed by the superior officers. In this regard, he referred to and relied upon the following cases: 22. Dealing next with Shri Rama Iyer's contention that the Assessing Officer having exercised his discretion not to levy penalty, the Commissioner could not have taken recourse to Section 263, Shri Rajan contended that the discretion vested with the Assessing Officer must be based on objective and not subjective satisfaction of the Assessing Officer. Where the discretion was obviously erroneously exercised, such an exercise could always be called in question. In this regard, he referred to and relied upon the following cases: Continuing his arguments on this point, Shri Rajan contended that the case before us was not one of technical or venial default. It was one of systematic omission of tailoring charges. What was more, the said systematic omission came to be detected by the Department in the course of the search and seizure operations conducted by the Department and, consequently, this is a case where penalty under Section 271(1)(c) is eminently leviable. Viewed thus, the observations of the Madras High Court in the case of Vevkatakrishna Rice Co. (upra), referred to and relied upon by the assessee's counsel, supported the Department rather than the assessee.
23. The next limb of Shri Rajan's argument was that the revised return filed by the assessee could not be regarded as one filed under the Amnesty Scheme. As will be clear from the answers to question Nos. 12, 19 and 30 given in CBDT Circular No. 451 of 17-2-1986, the Amnesty Scheme was not intended to benefit assessees in whose cases the Department had detected concealment in the course of search and seizure operations. Even the CBDT Circular No. 441 of 15-11-1985 cannot avail the assessee, because, the circular had been substantially amended by the CBDT Circular No. 451, particularly as respects search and seizure cases.
In this connection, Shri Rajan contended that the assessee's attempt to bring the revised return under the Amnesty Scheme was clearly an afterthought. Neither before the ITO, nor before the first appellate authority, nor even before the ITAT, had the assessee raised the plea that his case was covered by the Amnesty Scheme. Thus, before the CIT(A), all that the assessee contended was that the undisclosed income from the tailoring establishment estimated by the Assessing Officer was not sustainable particularly in view of the fact that the Assessing Officer had not given credit for the cost of the inputs. It was in that connection that the assessee had produced before the CIT(A) the data relating to the cost of inputs, on the basis of which the CIT(A) reduced the addition to Rs. 2,43,161.
Similarly, before the ITAT also, the arguments turned on the deduction to be allowed towards the cost of inputs. For a fact, the decision of the ITAT to call for a Remand Report, inter alia, on the cost of the inputs could be understood only in the context that the arguments before the Tribunal turned on the reasonable deduction that should be allowed towards the cost of inputs, and not on the question whether the assessee's case was covered by the Amnesty Scheme.
24. In view of the foregoing, therefore, contended Shri Rajan, the arguments based on the Amnesty Scheme are fit to be rejected.
25. The next limb of Shri Rajan's argument was that simply because the assessee's income from tailoring establishment was estimated, it did not necessarily follow that no penalty was exigible. In the case before us, systematic suppression of tailoring charges in the previous years relevant to the earlier assessment years came to be detected during the search and seizure operations. The assessee was asked to produce the primary records such as Order Book, Daily collection chittai, etc.
relating to the assessment year 1983-84. But the assessee failed to produce them on the ground that they had been destroyed. It was, therefore, that the Assessing Officer had no go but to estimate the suppressed income of the assessee. What is more significant, the assessee himself estimated the unaccounted tailoring charges at Rs. 1 lakh and the net income therefore at Rs. 37,000 roundly. One thing, therefore is clear and that is that even according to the assessee, there was suppression of tailoring charges. In the circumstances, therefore, penalty is clearly exigible.
In this regard, besides relying upon the cases referred to and relied upon by the CIT, Shri Raj an also referred to and relied upon the Madras case of A.K. Bashu Sahib v. CIT [1977] 108 1TR 736 and the case of Smt. V. Kanakammal v. ITO [1990] 33 ITD 157. Shri Raj an pointed out that the CIT had rightly relied on a series of decided cases in which it had been held that where the factum of concealment is proved, penalty will be exigible even though the quantum of the suppressed income is estimated.
26. Rebutting the arguments of Shri Rama Iyer that the case was covered by the provisions of Explanation 1(B) to Section 271(1) (prior to its amendment), Shri Rajan vehemently contended that the proper provisions to apply are those contained in Explanation 1(A) to Section 271(1) of the Act; and that consequently, the proviso to Explanation 1 (B) cannot avail the assessee. The facts of the case are that systematic suppression of tailoring charges were detected by the Department in the course of the search and seizure operations. What was more, the assessee himself admitted suppression of such charges to the extent of Rs. 1 lakh. The significant fact is that the assessee did not offer any explanation as to the systematic omission of tailoring charges. For a fact, he had none. Therefore, the case is covered by Explanation 1(A) to Section 271(1).
27. Summing up his arguments, Shri Rajan contended that this was a fit case for imposing penalty under Section 271(1)(c) of the Act. However, strangely the Assessing Officer dropped the penalty proceedings; that the dropping of the penalty proceedings was erroneous in that it is prejudicial to the interests of the Revenue; and that consequently, the CIT was justified in passing the impugned order in revision.
28. In his reply, Shri Rama Iyer, besides traversing the area he had earlier traversed, contended that the assessee's letter dated 26-1-1986 to the Income-tax Officer clearly relied on Circular No. 441. Secondly, the seized books, which disclosed suppression of tailoring charges, related to the earlier assessment years. During the search, no document was found which went to show that the assessee had suppressed receipts during the previous year relevant to the assessment year 1983-84, which is now before us. Shri Rama Iyer went to the extent of saying that no prima facie belief could possibly have been entertained by the Assessing Officer to the effect that the assessee had suppressed tailoring charges during the relevant previous year.
29. Drawing our attention to paragraph 3 of the assessee's letter dated 23-1-1989 (see page 8 et seq of the paper book filed by the assessee), Shri Rama Iyer contended that the provisions of Explanation 1 (B) to Section 271(1) (as they stood prior to the amendment) clearly applied to the case.
30. Adverting next to Shri Rajan's contention that the assessee had not raised any plea based on the Amnesty Scheme before the authorities in the quantum proceedings, Shri Rama Iyer contended that the stand taken in the quantum proceedings would not be conclusive in matters relating to penalty.
31. Shri Rama Iyer then urged that we should not lose sight of the fact that all that had happened in the assessment for the assessment year 1983-84 was that the assessee had come forward admitting suppression of tailoring charges of Rs. 1 lakh and that the suppressed income ultimately came to be estimated by the IT authorities. In these circumstances, the Madras decisions in the cases of J.K.A. Rajappa Chetiiar (supra) and K.P. Kandasami Mudaliar & Sons (supra) would be applicable. He further contended that the aforesaid two decisions which are later decisions, must be preferred to the earlier decisions to the contrary. In this regard, he referred to and relied upon the Madras case of CIT v. B. Nagi Reddi [ 1983] 144 ITR 62.
32. In view of the foregoing, therefore, contended Shri Rama Iyer, the assessee is entitled to succeed.
33. We have looked into the facts of the case. We have considered the rival submissions.
34. The rationale behind Section 263 of the Act, it is well settled by a long line of decided cases, is that a superior officer must be given the power to pass orders in revision to set at naught orders of lower authorities which are prejudicial to the interests of the Revenue.
Orders that are prejudicial to the interests of the Revenue are those that are not in accordance with law, and which by the same token prevented the realisation of revenue lawfully due to the State. The orders passed by the lower authorities might turn out to be prejudicial to the interests of the Revenue for such diverse reasons as, inexperience of the lower officers, lack of adequate technical expertise, and negligence on the part of the lower officers and the like. Orders may be prejudicial to the interests of the Revenue owing to mala fide on the part of the lower officers even. Irrespective of the factors in which such prejudicial orders had had their genesis, the scheme of the Act is to set such orders at naught. It was precisely for this purpose that the powers of revision have been conferred on the higher authorities.
35. So far, there is no difficulty, as there is no difference of opinion between the parties before us on the aforesaid rationale of Section 263 of the Act.
There is, however, sharp difference of opinion on the question whether at all there was an order in this case and whether at all this is a fit case for levy of penalty under Section 271(1)(c) of the Act.
36. It is a matter of record that proceedings for levy of penalty under Section 271(1)(c) of the Act, which had earlier been initiated, came to be dropped by the Assessing Officer through a note which reads as follows: The assessee's representative, Shri A. Satyamurthy, Advocate, appears and explains. Taking into account the written reply filed and also the explanation offered, penalty under Section 271(1)(c) is dropped.
Treating the said note as an order within the meaning of Section 263 of the Act, the Commissioner had passed the impugned order in revision.
Shri Rama Iyer's contention is that the said minute is not an order within the meaning of the said section. This contention is naturally opposed by Shri Rajan.
37. As we see it, as rightly contended by Shri Rajan, the power to levy penalty includes the power not to levy penalty and, consequently, even a minute recorded by the Assessing Officer to the effect that the penalty proceedings are dropped, is an order within the meaning of Section 263 of the Act. As already pointed out, orders that are prejudicial to the interests of the Revenue are those that are not in accordance with law and which by the same token have prevented the realisation of revenue lawfully due to the State. Conceptually speaking, therefore, in the context in which it appears in Section 263 the word "order" denotes acts of omission or commission on the part of the Assessing Officer which have prevented the realisation of revenue lawfully due to the State. Viewing the matter thus - and we are convinced that that is the right way of viewing the matter -we consider the impugned minute of the Assessing Officer is an order within the meaning of Section 263 of the Act and is, by the same token, amenable to the provisions of Section 263.
38. We may here highlight the fact that not only in the context of penalty proceedings, but also in the context of assessment proceedings and proceedings relating to the levy of tax in terrorem under Section 23A of the old Act/Section 104 of the new Act, it has been held by the courts (see the cases referred to and relied upon by Shri Rajan) that a note to the effect that proceedings are dropped is tantamount to an order. The reason is not far to seek. The term "order" refers to a decision taken by an authority who is empowered to take such decision.
The decisions may have civil or, as the case may be, criminal consequences. The decisions may be favourable or unfavorable. The Statute/Rules may or may not prescribe a formal format in which the decision is to be conveyed. But the essence of the matter is that an order denotes a decision taken by an authority who is empowered to take the decision. And that the decision must have civil or criminal consequences to the parties concerned.
39. In the case before us, the Assessing Officer decided to drop the penalty proceedings that had earlier been initiated; and gave body and shape to the decision in the form of the impugned minute. The decision was favourable to the assessee in that he was not obligated to pay penalty; and was unfavorable to revenue in that no penalty was collected. A speaking order it is not; it is an order never the less.
It should therefore follow that the impugned minute of the Assessing Officer is an order within the meaning of Section 263 of the Act. We hold accordingly.
Before taking leave of this aspect of the matter, we may point out that the Supreme Court decision in the case of Bidhu Bhusan Sarkar (supra), referred to and relied upon by the assessee's learned counsel, turned on the peculiar facts of that case. There, parallel proceedings had been commenced in respect of the same assessee. The ITO noted: "The case is, therefore, filed". In that context, the Supreme Court held that the intention of the ITO was that the said proceedings should no longer remain in existence because they were unnecessary and hence should be terminated or dropped. The other proceedings, however, were followed up. The said case clearly cannot be taken as an authority for the proposition that in all circumstances, a note to the effect that the proceedings be dropped cannot be treated as an order.
40. The question that then arises for consideration is whether the said order is erroneous in that it is prejudicial to the interests of the Revenue. The answer to this will depend on the answer to the further question, whether, on the facts and circumstances of the case, the CIT was justified in concluding that penalty under Section 271 (1)(c) was exigible in this case. To answer this question, we must go to the facts of the case.
41. The facts of the case are that in the course of search and seizure operations, the Department seized a number of records, which revealed that the assessee was systematically suppressing tailoring receipts.
The amount suppressed ranged from Rs. 13,542 in the previous year relevant to the assessment year 1980-81 to Rs. 2,88,735 in the previous year relevant to the assessment year 1982-83. When the Assessing Officer discovered the above suppression of tailoring charges, he naturally called upon the assessee to produce the Order Books, and Daily collection chittais relating to the assessment year 1983-84, which is now before us. The assessee responded by contending that the said records had been destroyed. Even so, he came forward with an admission that during the previous year relevant to the assessment year 1983-84, there had been suppression of tailoring receipts which he quantified at Rs. 1 lakh. According to him, the net income from the said suppressed receipts amounted to Rs. 37,000 roundly. On this basis, he filed a revised return of income. On his part, the Assessing Officer, going on the basis of the extent of suppression of tailoring receipts made by the assessee in the previous years relevant to the immediately preceding three assessment years, estimated the suppression at Rs. 3,50,000. He also refused to give any allowance for the cost of inputs on the ground that such costs had already been recorded in the books of accounts which the assessee had produced before the Department. Ultimately, the Tribunal fixed the net income to be added on account of suppression of tailoring receipts at Rs. 1,43,437.
42. There is a related aspect of the matter that is noteworthy. In the quantum appeal before the ITAT, that assessee initially assailed in toto the addition sustained by the CIT(A). Even so, as is clear from paragraph 4 of the ITAT order, "eventually... the learned counsel submitted that he would confine his claim to the allowance of two items of deductions.", namely, (a) tailoring charges paid to others Rs. 48,724 and (b) expenditure on inputs Rs. 51,000. And it is a matter of record that the Tribunal allowed the assessee the benefit of the said deductions.
The significance of the said decision of the Tribunal, as we see it, lies in the fact that, according to the Tribunal, while an addition was called for towards tailoring charges suppressed by the assessee, the gross receipts suppressed should not be treated as the assessee's income and that it was necessary to set off against the suppressed gross receipts the expenditure incurred by the assessee to earn the receipts. The said decision can be understood only on the basis that just as he had suppressed tailoring charges, so he had failed to account for the said two items of expenditure; and that, consequently, it was only fair that the suppressed tailoring charges net of the outgo should be treated as the assessee's income. Implicit in the said claim of the assessee, which was accepted by the Tribunal, is the fact that, admittedly, the assessee had met some expenditure out of the suppressed receipts, thus underscoring the factum of suppression of tailoring charges and consequently the income flowing therefrom.
During the relevant previous year, the assessee had made various investments which he had failed to account for in his books of account; and the Tribunal ultimately quantified such investments at Rs. 1,48,094. Even here, the assessee asked for and obtained a set off (against the said sum of Rs. 1,48,094) a sum of Rs. 1,24,000 from out of the "amount added in respect of turnover outside the books". The Tribunal allowed the assessee's claim, because in respect of such suppressed turnover "cash would have been available to the assessee".
Here again, the assessee's claim merely underscores the factum of suppression of income by the assessee.
Items of expenditure not recorded in the books of account, undisclosed or unexplained investments are but the outward manifestation of undisclosed income. The discovery of the former is ipso facto the discovery of the latter.
43. Given the totality of the circumstances, we have no hesitation in coming to the conclusion that the case before us is clearly one of suppression of income.
44. It is also significant that the assessee came forward with a revised return of income for the assessment year 1983-84, only after the search and seizure operations brought to light systematic suppression of tailoring charges. Therefore, the filing of the revised return on the basis that tailoring charges had been suppressed only to the extent of Rs. 1 lakh could not be regarded as voluntary in true sense of the term.
45. The learned counsel for the assessee, it may be recalled, vehemently contended that no penalty was exigible in this case, because ultimately the assessee's income came to be estimated. And, in this regard, he referred to and relied upon various reported cases - see para 17(e) supra. We must at once point out that, turning as they did on facts found therein, the said cases cannot avail the assessee.
To the facts of the case before us, as we see it, the ratio of the Madras case of A.K. Bashu Sahib's case (supra) clearly applies. In that case, the assessee, a bus operator, was maintaining accounts but he did not produce them before the Income-tax authorities who estimated his income rejecting the income as returned by him. In the penalty proceedings, the contention of the assessee that no concealment of income, or furnishing of inaccurate particulars could be inferred from the difference between the estimates made by the assessee and those made by the officer, was negatived by the officer and penalty levied under Section 28(1)(c) of the old Act. The Tribunal declined to interfere in the matter. Rejecting the Reference Application filed at the instance of the assessee, the Madras High Court held: The assessee must have been aware of his real income but still he estimated his income for the assessment years deliberately at a lower amount. It cannot be said that in all cases where the taxing authorities estimated the income at a higher figure than that estimated by the assessee, no penalty was leviable. Where the estimate of the assessee amounts to a deliberate understatement, an inference of concealment of income could certainly be drawn. The facts of the present case clearly show that the assessee had deliberately underestimated his income and this was not a case of a mere furnishing of inaccurate particulars. Hence, the penalty levied was justified.
46. For a fact, the said ratio is applicable to the case before us with even greater force. Here, as pointed out earlier, systematic suppression of tailoring charges was detected. Only when he was faced with the said detection that the assessee came up with the admission that he had suppressed tailoring charges to the extent of Rs. 1 lakh.
No doubt, the quantum of the income arising out of the suppressed receipts came to be estimated by the Tribunal at Rs. 1,43,437. Even so, the assessee's filing a revised return on the basis of his own estimate cannot be said to be voluntary in the true sense of the term. He was forced to do so by the fact that the search and seizure operations had revealed systematic suppression of tailoring charges, though in the previous years.
47. In view of the foregoing, therefore, we hold that this was a fit case for levy of penalty under Section 271(1)(c) of the Act. Yet, for reasons best known to himself, the Assessing Officer chose to drop the penalty proceedings. The minute recorded by the Assessing Officer to that effect is clearly an order which is erroneous in that it was prejudicial to the interests of the Revenue. We, therefore, hold that the CIT was justified in taking recourse to Section 263 of the Act.
48. We are not impressed by Shri Rama Iyer's argument that the Assessing Officer having dropped, in his discretion, the penalty proceedings, Section 263 could not avail the CIT. It is well-settled that the exercise of discretion cannot be arbitrary. Proper exercise of discretion is one that is palpably in accord with the facts of the case. If, on the contrary, the exercise of discretion is bereft of any reasonable relationship to facts, such an exercise of discretion must at once be branded as arbitrary and erroneous.
49. Thus, in the Kerala case of Cochin-Malabar Estates Ltd. (supra), the Assessing Officer failed to charge interest under Section 215 of the Act without giving any reason. The Commissioner passed an order in revision setting aside the impugned assessment orders to the extent those orders "impliedly failed to charge interest under Section 215 of the Act". As for the argument that interest under the said section could be waived, the Commissioner was of the view that the issue was in the first instance to be considered by the ITO. On its part, this Tribunal, raising a presumption that the ITO had exercised a discretion under Section 215(4) of the Act, set aside the order in revision. On reference, the Kerala High Court held that no material had been relied on by the Tribunal for the presumption drawn by it. In this view of the matter, it upheld the order in revision passed by the Commissioner.
50. In the Calcutta case of Premchand SitanathRoy (supra), the ITO failed to charge interest under Section 139(1). He did not give any reason for not charging interest under the said section. The impugned assessment order was subject-matter of revision under Section 263. In the Writ proceedings, it was contended on behalf of the assessee, inter alia, that since Section 139(8) gave the ITO the discretion to charge or not to charge interest, it must be held that the ITO had exercised his discretion in favour of the assessee. This argument was repelled by the High Court, which dismissed the Writ Petition. In that connection, the High Court observed that where a discretion had been given to an officer concerned, the exercise of that discretion, one way or the other, unless it is contrary to the settled principles of law or exercised mala fide or on improper materials, cannot be the subject-matter of revision. In the case under consideration, however, there was no evidence that the ITO had exercised the discretion or applied his mind to the facts of the case. Where the statute gives an authority or jurisdiction for exercise of discretion on certain objective factors, the exercise of such discretion must be manifest, so that it could readily be gathered by all concerned whether the discretion had been properly exercised or not.
51. In the Kerala case of V. Subramonia Iyer (supra), it has been held that what is contemplated under Section 271(1) is not the subjective satisfaction of the ITO. The true effect of the said ratio is that when the ITO proceeds to levy penalty or decides to drop the penalty proceedings initiated, his satisfaction to that effect must be borne out by the facts and circumstances of the case. Where the decision taken by him is contrary to the facts of the case, then his decision must be held to be arbitrary and struck down as such.
52. In view of the foregoing, therefore, we hold that given the facts of the case, which clearly warrant levy of penalty, the Assessing Officer had arbitrarily exercised his discretion to drop the penalty proceedings.
53. The question that then arises for consideration is whether the revised return is governed by the Amnesty Scheme. As we see it, it is not. As rightly pointed out by the CIT, the scheme was that no questions would be asked if the assessees took into account their undisclosed income for purposes of filing advance tax estimates and paid tax accordingly. Subsequently, the scheme got enlarged into a full-fledged voluntary disclosure scheme. But the significant point to be noted is that the scheme did not encompass search and seizure cases and also other cases where the department had detected concealment. The reason is not far to seek. When the Department detects concealment, it must be free to pursue the matter to the end. And the assessees concerned cannot be permitted to avail themselves of the benefits of the Amnesty Scheme and escape the rigours of penalty and prosecution.
This will be clear from the answers to question Nos. 12,19 and 30 contained in the CBDT Circular No. 451 of February 17, 1986 (158 ITR - St. 135).
54. As already pointed out, the revised return filed by the assessee could not be regarded as a voluntary return in the true sense of the term because, faced with the detection by the Department of systematic suppression of tailoring charges, the assessee had no go but to come clean. We, therefore, hold that the assessee cannot get the benefit of the protective umbrella of the Amnesty Scheme.
55. The question that next arises for consideration is whether Explanation 1(A) or Explanation 1(B) to Section 271(1) applies to this case. Before us, lengthy arguments have been advanced on this point by the counsel for both the sides. As we see it, the case before us is governed by the main provisions of Section 271(1)(c) itself inasmuch as, by resorting to suppression of tailoring charges, the assessee had concealed the particulars of his income and furnished inaccurate particulars thereof. Even so, we consider, as rightly pointed by Shri Rajan, this is a case which falls under Explanation 1 (A) because, the assessee had failed to offer any explanation for the suppression of tailoring charges. For a fact, the details of the tailoring charges actually received by him being a matter within his personal knowledge, the question of the assessee's offering 'an explanation which he is not able to substantiate' does not arise. It is for the assessee to make a clean breast of the whole thing, and this he failed to do. Therefore, Explanation 1(B) and the proviso to Explanation 1 cannot avail the assessee.
56. We may now consider the arguments based on the bar of limitation imposed by Section 275 of the Act. The assessee's case is that the time limit for passing a penalty order expired on 28-2-1989 and that consequently, the order in revision passed by the Commissioner on 25-3-1991 is really infructuous. It is also the assessee's case that the minute recorded by the Assessing Officer dropping the penalty proceedings is not an order within the meaning of Section 263 and that consequently, the Commissioner could not lawfully take recourse to Section 263 to extend, by the back-door as it were, the period of limitation prescribed under Section 275 of the Act.
As we see it, both the arguments are without force. As for the latter argument, we have already held that the impugned minute recorded by the Assessing Officer is an order. As for the former, as rightly contended by Shri Rajan, there is a long catena of cases in which it has been laid down that the period of limitation prescribed by Section 275 is applicable only to the initial order to be passed by the Assessing Officer and not to the orders that he statutorily obligated to pass pursuant to the directions given by the superior officer such as the Commissioner or the CIT(Appeals), the ITAT., etc. We, therefore, reject the related grounds.
57. In view of the foregoing, therefore, we hold that on the facts and in the circumstances of the case, the CIT was justified in taking recourse to Section 263 of the Act and in setting aside the impugned minute recorded by the Assessing Officer and in directing the Assessing Officer to pass a fresh order under Section 271 (1)(c) of the Act in accordance with law.