1. This is a departmental appeal for assessment year 1982-83 directed against the order of the Commissioner of Income-tax (Appeals)-III, Andhra Pradesh, Hyderabad dated 15-11-1989. The appeal is against cancellation of penalty under Section 271(1)(c).
2. The facts leading to the present appeal are the following. The assessee is a firm of five partners. The business of the firm is exhibition of cinematographic films in the theatre 'Rajaylakshmi Mahal', Pulivendla. For assessment year 1982-83 for which the previous year ended on 31-12-1981, the assessee-firm filed its return disclosing a loss of Rs. 31,143 from its business. However, the assessment was completed under Section 143(3) of the Income-tax Act on 27-12-1982 on a positive income of Rs. 15,960. During the course of the assessment proceedings, the Assessing Officer had the occasion to examine the accounts of the partners of the assessee-firm. He had noticed cash credits to the extent of Rs. 47,100 in the personal accounts of the partners. The particulars of the cash credits found in the personal accounts of each of the partners are given by the Income-tax Officer in his penalty order dated 21-3-1985 and, therefore, they need not be repeated here. As usual in the earlier years, the assessee's A.R. who appeared before the Income-tax Officer with accounts etc. surrendered the above total credits as income of the assessee since even after adjustment of Rs. 41,000. It results in a small tax effect of Rs. 328.
Penalty proceedings under Section 271(l)(c) were initiated during the course of assessment proceedings. On behalf of the assessee, a reply was sent on 20-3-1985. It was contended that the credits noted in the personal accounts of each of the partners represent their agricultural income. However, the same was agreed to be added as income of the assessee-firm as the firm could not readily explain the credits. In fact the amounts of credit should not have been taken and computed in the total income of the assessee-firm. However, by virtue of his letter dated 27-12-1982, the total of the credits were added to the firm's income. The Income-tax Officer, B-Ward, Cuddapah who conducted the penalty proceedings held that having agreed to the addition in the course of assessment proceedings, the assessee cannot dispute the concealment of the amount. The Income-tax Officer himself had stated that in earlier years also namely, 1979-80, 1980-81 and 1981-82, the assessee has been consistently introducing similar undisclosed business income in the garb of cash credits in the various personal accounts of the partners. Since those assessments were completed under Section 143(1), the assessee escaped penal consequences. However, in the assessment proceedings for assessment year 1982-83 when the credits were detected and pointed out, the assessee's A.R. has no objection to include the same in the total income of the assessee. The Income-tax Officer held that thus the assessee had been deliberately and consistently suppressing its business income and bringing it in its account books in the shape of cash credits and, therefore, after getting the approval of the Inspecting Asstt. Commissioner, the Income-tax Officer levied a penalty of Rs. 12,694 under Section 27l(l)(c). Against the said penalty order dated 21-3-1985, the assessee went in appeal before the Commissioner of Income-tax (Appeals)-III, Andhra Pradesh, Hyderabad. The learned Commissioner (Appeals) held that there was no case to levy penalty under Section 271(1)(c). The reasons given are the following. Each of the partners of the assessee-firm was having substantial agricultural holdings. Each of them was having 15 acres of agricultural land and in fact the main source of livelihood of each of the five partners of the assessee-firm is agriculture. Every year partners were crediting agricultural incomes to their accounts and in some years they offered the credits in their personal accounts as incomes of the firm because of the small revenue effect involved.
Accordingly even for this assessment year also, namely, 1982-83, the assessee showed a loss and even after considering Rs. 47,000 as income, the tax payable came to Rs. 328 and because of such negligible tax effect, the assessee had offered the sum of Rs. 47,000 for assessment.
The agreement is confined only to treating the amount as part of the income of the assessee. It was never conceded that Rs. 47,100 represented the concealed income of the assessee. The burden to prove that it represents concealed income is on the Department and the said onus was never discharged. In view of the large agricultural holdings of the partners, it would not be difficult for the assessee-firm to prove that the cash credits of Rs. 47,100 shown in the personal accounts of each of its partners really represented agricultural incomes of the respective partners. The Income-tax Officer did not bring any evidence on record disproving this basic contention of the assessee that the credits represented agricultural incomes of the partners. Hence there was no justification at all in levying penalty by invoking the provisions of Section 271(1)(c). The contention of the assessee is found to have the support of the following decisions: (2) Addl. CIT v. Burugupalli China Krishnamurthy [1980] 121 ITR 326 (AP) (5) Sir Shadilal Sugar & General Mills Ltd. v. CIT [1987] 168 ITR 705 (SC) Therefore, the learned Commissioner (Appeals) had allowed the appeal filed by the assessee and cancelled the penalty imposed by the Income-tax Officer. As against cancellation of penalty, the second appeal is filed by the revenue. Thus, the matter stands for consideration of this Tribunal.
3. This Tribunal heard Sri C.V. Surya Prakash Rao, learned Departmental Representative and Shri S.A. K. Jellany Basha. The assessment order for 1982-83 dated 27-12-1982 framed against the assessee-firrn, the docket dated 27-12-1982, the explanation offered by the assessee dated 20-3-1985 were all filed by the learned Departmental Representative, whereas on behalf of the assessee, the learned Advocate besides relying upon several case laws to which a mention would be made shortly have also filed the decision of B-Bench of this Tribunal passed in the case of Ramachandra Transport v. IAC [IT Appeal Nos. 1102 to 1104 (Hyd.) of 1988, dated 28-11-1990] to support their stand that it is not a case where penalty can be levied. Learned Advocate for the assessee had relied upon the following case laws: Sir Shadilal Sugar & General Mills Ltd.'s case (supra), Burugupalli China Krishnamurthy's case (supra), CIT v. C.V.C. Mining Co. [1976] 102 ITR 830 (AP), Girdharilal Soni's case (supra), M. George & Bros.' case (supra), Punjab Tyres' case (supra), CIT v. Anwar AH [1970] 76 ITR 696 (SC) and CIT v. Khoday Eswarsa & Sons [1972] 83 ITR 369 (SC).
The above decisions were relied upon in order to show that the onus to prove concealment lies on the part of the department and simply because an addition is agreed to in the assessment proceedings, it does not automatically represent an item of concealment of income as such. A concession made in the assessment proceedings does not serve as a concession made in the penalty proceedings automatically.
4. The learned Departmental Representative in a bid to buttress his case and present it as a fit case where penalty should be levied relied upon the following case law: (2) Addl. CIT v. Prasadi Sao Rqjendra Prasad [1984] 145 ITR 504 (Pat.); and 5. Having considered the rival arguments on both sides, this Tribunal is of the opinion that it is not a fit case where penalty can be sustained and, therefore, the Tribunal feels that the impugned order passed by the learned Commissioner (Appeals) is perfectly justified though not for the same reasons which he held in his impugned appellate orders. The penalty relates to assessment year 1982-83. The income-tax return disclosing loss of Rs. 31,143 was filed on 25-10-1982. The assessee was a firm of five partners. In the capital accounts of these five partners some credits were found totalling to Rs. 47,100 and when the Income-tax Officer had asked for the source of the credits, the assessee-firm did not have any explanation whatsoever and surrendered the same as income of the assessee-firm. In the assessment order dated 27-12-1982, the following is what is stated by the Income-tax Officer justifying the addition of Rs. 47,100 to the returned loss of Rs. 31,143: The assessee's A.R. says that there is no explanation to offer regarding the source of the credits. In the circumstances all these credits are treated as income of the firm for which the assessee's A.R. has no objection. Total income is computed as under:Loss admitted Rs. 31,140Less: Credits in partner's firm Rs. 47,100 ------------ It is significant from the above quoted portion of the assessment order that the Income-tax Officer did not actually found on due enquiry that the sum of Rs. 47,100 is the concealed income of the assessee-firm for the accounting year relevant to assessment year 1982-83. In reply to the penalty notice dated 27-12-1982, the assessee took the stand that it had agreed to the addition of the concealed income on the understanding that no penalty proceedings will be initiated for concealment. Even otherwise, concealment was not established but the credits were added because the assessee-firm could not readily explain the credits. All the partners are agriculturists and the credits came from their agricultural income. This was established in the first year of assessment. Even otherwise credits will have to be considered in the partner's hands and not as the firm's income. Thus the contention of the assessee was that in any event, the addition should have been made not in the hands of the firm but in the hands of the partners in whose case definite sums of money was found as credit. It is contended that there was no firm finding that the sum of Rs. 47,100 constituted concealed income of the assessee for assessment year 1982-83. In the absence of such a firm finding from the Income-tax Officer, even in the assessment proceedings, it cannot be considered to be concealed income of the firm. Further if any sustainable addition is to be made it should be only in the individual assessments of the partners. Against the addition of Rs. 47,100 no appeal was preferred by the firm because it had sustained substantial losses and the loss that was returned in thatyear was Rs. 31,143 and even after the addition of Rs. 47,100, the tax payable would come to a negligible sum of Rs. 328 and not because the explanation, offered was not true and cannot be substantiated.
Since this is a penalty arising for 1982-83, the law applicable thereto is Section 271(1)(c) read with Explanations I to 6 introduced with effect from 1-4-1976. The present set of Explanations 1 to 6 had replaced a single Explanation which used to be existing in the statute book from 1-4-1964 to 31-3-1976. The old Explanation was stated to be containing only a rule of evidence and procedure. Therefore, even though it is not specifically invoked in the course of the penalty proceedings or even the Income-tax Officer fails to do so, the appellate authorities like the Deputy Commissioner and the Tribunal must examine its applicability before arriving at their decision whether the penalty is or is not leviable. This proposition of law was found enunciated at page 5977 of Sampat Iyengar's Law of Income-tax, 8th Edn. revised by Justice S. Ranganathan. In that treatise it is stated as follows:- It follows, from the view that the Explanation only postulated a rule of evidence and procedure, that no specific reference and reliance need be placed on the Explanation in the show-cause notice itself. The Assessing Officer can invoke it in the course of the penalty proceedings and, even if he fails to do so, the Deputy Commissioner and the Tribunal must examine its applicability before arriving at their decision whether a penalty is or is not leviable.
This legal position is supported by the decision in Kantilal Manilal v.CIT [1981] 130 ITR 411 (Guj.), CIT v. Drapco Electric Corpn. [1980] 122 ITR 341 (Guj.), Addl. CIT v. Motisingh [1983] 144 ITR 133 (MP), CIT v.Prabhat Bakery [l979] 162 ITR 173 (Punj. & Har.). As already stated, the erstwhile explanation which was in vogue till 31-3-1976 was replaced by a new set of Explanations 1 to 6. Examining the nature of Explanation 1, the same learned author in Sampat Iyengar's Law of Income-tax, 8th Edition, Vol. 6 at page 5986 held the following:- The position after the insertion of Explanation 1, with effect from 1-4-1976, is different in the sense that this Explanation 1 may well be considered as being more than a rule of evidence, as a rule of substantive law relating to penalty for concealment. This Explanation is to the effect that where in respect of any fact material for purposes of his assessment an assessee offers an explanation which is found by the Assessing Officer or the Deputy Commissioner (Appeals) to be false or where the assessee is unable to substantiate his explanation, then the amount added back to his assessment shall be deemed to represent his concealed income.
Therefore, it can be seen that the main Section 271(1)(c) itself deals with two specific offences, i.e., to say, concealing particulars of income or furnishing inaccurate particulars income. In CIT v. C.K. Nana & Bros. [1979] 117 ITR 19 (Cal.) and Padma Kom Bharali v. CIT [1977] 110 ITR 54 (Gauhati) and also in CIT v. Patna Timber Works [1977] 106 ITR 452 (Pat.), it was held that initiating a penalty proceeding for one offence and finding the assessee guilty of another offence or finding him guilty of either one or the other cannot be sustained in law, unless inaccurate particulars are furnished to strengthen his concealment of income by a particular assessee. In C.K. Naha & Bros.' case (supra), the Income-tax Officer initiated penalty proceedings treating the sum of Rs. 10,263 as amount of concealed income and referred the case to the Inspecting Asstt. Commissioner. However, while giving permission to the penalty proceedings, the Inspecting Asstt.
Commissioner imposed a penalty on a different sum of Rs. 19,647 by making out a new case of concealment of that sum. It was found by the Tribunal that the sum of Rs. 10,263 was not included in the amount of Rs. 19,647. In those circumstances, the Calcutta High Court held that penalty order passed by the Inspecting Asstt. Commissioner was void.
Thus in the understanding of this Tribunal, there are at least three specific offences now found in the provisions of Section 271 (1)(c) read with Explanations 1 to 6 which was in vogue from 1-4-1976 onwards.
The three specific offences are: (iii) Committing the offence of deemed concealment under Explanation 1 to Section 271(1)(c).
All the three offences adumbrated above are substantial provisions. In the understanding of the Tribunal penalty proceedings cannot be initiated under one such substantial provision and it cannot be justified under another substantial provision for which notice of penalty was not issued. In Padma Ram Bharali's case (supra) the Gauhati High Court had the occasion to consider a case of penalty which was initiated for concealing the income and which was substantiated on another ground, namely, furnishing of inaccurate particulars of income.
The question at issue before their Lordships was whether in those circumstances such penalty can be sustained. As per the headnote of the decision, the following is what is held at page 55: The initiation of penalty proceedings being for concealment of particulars, the Tribunal could not uphold the penalty on the ground that the assessee would be deemed to have concealed particulars of income or to have furnished inaccurate particulars of such income.
In the facts of that case penalty of Rs. 28,742 had been imposed under Section 271(1)(c) read with the Explanation. The Inspecting Asstt.
Commissioner in his order held that the assessee was guilty of furnishing of inaccurate particulars whereas the Tribunal upheld the penalty observing as follows: Hence, the assessee will be deemed to have concealed particulars of income or to have furnished inaccurate particulars of such income.
Thus, it can be seen that the Tribunal wanted to justify the penalty under the deemed Explanation whereas the initiation of penalty proceedings was for a specific offence of concealment of particulars of income. Thus, the basis for initiation of penalty proceedings is not identical with the grounds on which the penalty has been imposed. The Gauhati High Court held the following at page 63 of the reported decision: - It also has to be remembered that, clause (c) of Sub-section (1) of Section 271 deals with two specific offences, that is to say, concealing particulars of income or furnishing inaccurate particulars of income. No doubt, the facts of some cases may attract both the offences and in some cases there may be overlapping of the two offences, but in such cases the initiation of the penalty proceedings also must be for both the offences. But drawing up a penalty proceeding for one offence and finding guilty for another offence or finding guilty for either the one or the other offence, as has been done by the Tribunal in the instant case, cannot be sustained in law.
This view is supported by the decision of the Gujarat High Court in CIT v. Lakhdhir Lal ji [1972] 85 ITR 77 (Guj.) Ultimately, their Lordship had cancelled the penalty and set aside the Tribunal's order. This Tribunal may straightway observe that in this case, penalty notice was never issued for the offence of deemed concealment against the assessee-firm under Explanation 1 to Section 271(1)(c). The penalty notice itself was not filed before this Tribunal. However, the fact that penalty notice was issued and the ground on which it was issued were stated by the Income-tax Officer in his penalty order dated 21-3-1985. He stated in the penalty order as follows: A penalty notice under Section 271(1)(c) of the Act was initiated for concealing particulars of such income.
Thus, it can be seen that the Income-tax Officer had issued notice under the two limbs of the main section and he never touched Explanation 1 to Section 271(1)(c) or he never wanted to justify the penalty under Explanation 1 to Section 271(1)(c). Thus when there is no charge under Explanation 1 to Section 271(1)(c), the penalty cannot be sustained under a provision for which the assessee was not even charged and in this regard there is clear justification which can be derived from the decision of the Gujarat High Court in CJTv. Lakhdhir Lalji [1972] 85 ITR 77 which was extracted by the Gauhati High Court in Padma Ram Bharali's case (supra). Therefore, for this reason, the impugned order of the Commissioner (Appeals) should be sustained. Further the only other ground on which penalty was imposed by the Income-tax Officer was the following: - Having agreed to the addition in the course of assessment proceedings, the assessee cannot dispute the same now. Hence the assessee's reply is rejected.
Thus, it can be seen that the Income-tax Officer never treated the penalty proceedings as separate from the assessment proceedings. He failed to consider the right available to the assessee to substantiate that the addition made in the assessment proceedings was in fact not an item of concealed income. However, such a clear right was never recognised by the Income-tax Officer, let alone giving adequate opportunity to the assessee to substantiate such a plea in the penalty proceedings, independently, even after the close of the assessment proceedings. This is clearly wrong under law and for this reason also, penalty cannot be sustained. Several decisions cited by both sides are held to be not germane as they cannot be applied to the penalty proceedings of 1982-83 which are to be governed by Section 271 (1)(c), Explanations 1 to 6 which are in vogue from 1-4-1976 onwards. The earlier Explanation, as already discussed above, was considered to be only a procedural provision and not a substantive provision. Therefore, the decisions rendered with reference to that Explanation cannot be of much help to decide the penalties for concealment falling on or after 1-4-1976. Therefore, since the Tribunal does not want to burden its record any further, it wanted to observe that those decisions do not apply.
6. In the result, the appeal of the department is found to be without merit and hence it is dismissed.