Subhash Gupta Individual Vs Deputy Commissioner of Income Tax - Citation 72408 - Court Judgment

Judgment:
1. This appeal is preferred by the assessee against the order passed by the CIT(A), dt. 30th March, 2001, confirming the penalty, imposed by the AO under Section 271(1)(c) of the IT Act amounting to Rs. 14,45,240.

"1. On the facts and in the circumstances of the case the learned CIT(A) erred in confirming the penalty levied by the learned AO under Section 271(1)(c) amounting to Rs. 14,45,240.

2. That the learned CIT(A) further erred in holding that the assessee furnished inaccurate particulars of income and concealed income to the extent of excessive loss claimed.

3. That the learned CIT(A) further erred in not properly appreciating the fact that the assessee agreed to surrender the loss on the assurance given by the learned AO and consequently the penalty proceedings were not attracted in case of the assessee." 3. The brief facts of the case are that the assessee derives income from export of garments in the status of individual. The return of income was filed on 29th Oct., 1997, along with audit report under Section 44AB declaring a loss of Rs. 36,80,600 as under : In the computation of income, the assessee has also given following notes : (2) The assessee made export sales but deduction under Section 80HHC is not applicable due to losses. He fulfils other conditions entitled under Section 80HHC benefits.

4. During the course of assessment proceedings, the assessee has offered to surrender the loss claimed at Rs. 36,80,600 and agreed to, complete the assessment at nil income. Accordingly, the AO has completed the assessment at nil income vide order dt. 15th Feb., 2000, passed under Section 143(3) and has also initiated penalty proceedings under Section 271(1)(c).

5. In reply to the show-cause notice of the penalty proceedings initiated under Section 271(1)(c), it was submitted by the assessee that: "......I have to state that the assessment was completed by your goodself on Nil income on agreed basis. The addition was only trading addition as gross profit was lower and there was net loss in manufacturing and trading." 5.1. On the next date of hearing, the assessee has submitted that "We surrendered loss on agreed basis to avoid further litigation and to purchase peace" and relied on the following case laws : 1. Sir Shadi Lal Sugar & General Mills (P) Ltd. (1987) 168 ITR 705 (SC); 2. Addl. CIT v. Burugupalli Chinakrishnamurthy and Ors. (1980) 121 ITR 326 (AP); and requested that the penalty proceedings may be dropped as the surrender was made just to avoid further litigation.

6. The AO, after rejecting the assessee's explanation, has come to the conclusion that the assessee surrendered the loss only when deep investigation was started and he had no explanation to offer for the loss. In fact, there was no loss in the business and the assessee has fraudulently claimed it, which he ultimately surrendered. The assessee could not even explain the manufacturing defects as claimed. The AO was, therefore, of the view that the assessee has not filed the true particulars of his income. It was also found by the AO that the cases relied upon by the assessee are distinguishable and not applicable to the facts of the assessee's case. It was, therefore, held by the AO that the assessee has furnished inaccurate particulars of his income and concealed the same to the extent of Rs. 36,80,600 as surrendered and, accordingly, imposed minimum penalty at Rs. 14,45,240 vide order dt. 30th Aug., 2000.

7. On first appeal before the CIT(A), it was submitted by the assessee that he has filed every precise details as demanded from him and at no stage of assessment proceedings, he denied the information as demanded.

The assessee also objected the remark of the AO that the assessee had fraudulently claimed the loss, which is not well founded and the same is most casual and deserves no credence. The AO, at no stage of proceedings, has brought on record any material to prove that the assessee, in any manner, furnished inaccurate particulars of his income or had, in any manner, committed fraud. The rejection of assessee's explanation does not result in the levy of penalty. There was no specific enquiry into the correctness, truthfulness or accuracy of the particulars furnished by the assessee and concealment was not proved.

It was therefore, submitted that the penalty levied deserves to be deleted. The reliance was placed on the following decisions : (f) Rajasthan Vanaspathi Products (P) Ltd. v. Dy. CIT 20 Tax World 266 (Jp.Trib.); (h) Asstt. CIT v. Bansiwala Iron & Steel Re-Rolling Mills 21 Tax World 533 (Jp.Trib.); (j) ITO v. Manjit Singh Baldev Singh Commission Agents (1999) 65 TTJ (Amr) 400 : (1999) 69 ITD 197 (Amr); (k) Dy. CIT v. Smt. Pannaben P. Desai (2001) 73 TTJ (Ahd) 915 : (2000) 112 Taxman 84 (Ahd) (Mag);Shivam Art. Processors (P) Ltd. v. Asstt. CIT (2000) 69 TTJ (Ahd) 600; 7.1. Besides this, the assessee has also filed an affidavit stating therein that in response to telephone call, the assessee agreed to make a surrender to be assessed at nil income in order to avoid protracted proceedings and to purchase peace particularly when no financial burden was to come. This attendance was without his legal advisor and so he could not visualise situation particularly because every required details had been submitted during the early hearings by the counsel.

8. The CIT(A), after perusing the remand report of the AO on the basis of affidavit filed by the assessee, has confirmed the imposition of penalty and her findings recorded at paras 2.8 and 2.9 of the order are reproduced as below : "2.8. In view of the above position I do not find the argument given to be acceptable. The facts as enumerated by me above, show that the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claimed damage to stock. The appellant also could not provide any evidence at any stage in support of the claim that either stock was damaged or orders cancelled or that such damaged stock was sold locally in the market at lower than normal rate's. It is also not acceptable that AO has merely rejected the explanation of the appellant so that imposition of penalty is not justified. The assessee has not been able to prove its claim of loss for the reasons given by him in assessment proceedings nor in the appellate proceedings. It is also not an acceptable argument that assessee "agreed to surrender merely to purchase peace and, therefore, imposition of penalty was not justified. In view of the decision of the Hon'ble Supreme Court in the case of Union of India v. Banwarilal Agarwal (1999) 238 ITR 461 (SC), it has been categorically held that there is no provision in the Act sanctioning compromise with the assessee by the IT Department that no penal action would be undertaken. Therefore, it cannot be held that the assessee having agreed to surrender, no penal action should have been taken.

2.9. The position of law relating to concealment stands changed after insertion of Explanation to Section 271(1)(c). Therefore, in view of decision reported in the case of B.A. Balasubramanian & Bros. v. CIT (1999) 236 ITR 977 (SC) the earlier decision in the case of Anwar Ali is no longer good law and AO is not required to prove mens rea on the part of the appellant. Since it has become clear that assessee claimed a loss which it was not in position to substantiate nor was there any verifiable evidence in support of the claim, there is no doubt that appellant has furnished inaccurate particulars of income and concealed income in that year to the extent of such excessive loss claimed. It is not a justified argument that the claim of the assessee has been disallowed but that assessee does not have any evidence to support the claim made. Under the circumstances, the imposition of penalty was justified and the same is confirmed being reasonable at the minimum amount imposed," 10. The learned authorised representative, besides reiterating the same arguments/pleas which were taken before the CIT(A), further submitted that since the assessee has furnished complete details of his accounts and expenses, purchases and sales which are vouched and verifiable and has furnished details of loss, the AO, without rejecting the assessee's book results, has made in the order-sheet entry on 14th Feb., 2000, which reads as under : "Subhash Gupta, prop, attended. He offered to surrender the loss claimed. Hence the assessment is being completed on nil income to which the assessee agreed." In the penalty proceedings, the assessee has repeatedly submitted that the surrender was made on agreed basis to avoid further litigation and to purchase peace. It was further submitted by the learned authorised representative that there is no discussion in the assessment order that any adverse material was found during the course of assessment and the AO, without rejecting the assessee's accounts and without any material, has held that the assessee has fraudulently claimed the loss. It was also submitted by the learned authorised representative that the CIT(A), without appreciating the material submitted before her, has erred in holding that the loss claimed by the assessee has not been substantiated. The decisions relied upon by the learned CIT(A) are distinguishable and are not applicable to the facts of the assessee's case. It was, therefore, submitted by the learned authorised representative that the penalty imposed by the AO and confirmed by the CIT(A) should be deleted. The reliance was placed on the plethora of cases viz. CIT v. Suresh Chandra Mittal (2001) 251 ITR 9, 10 (SC), CIT v. Suresh Chandra Mittal (2000) 241 ITR 124 (MP), Sir Shadilal Sugar & General Mills Ltd. v. CIT (supra), Shivlal Tak v. CIT 25 Tax World 341 (Raj), Ess Ess Marbles (India) (P) Ltd. Assn. CIT 24 Tax World 352 (Jp), Ramsaran Gupta v. Asstt. CIT (supra), CIT v. Rhone Poulenc Ltd., Asstt. CIT v. D.N. Ghiya 23 Tax World 383 (Jp), Asstt. CIT v. Bansiwala Iron & Steel Re-Rolling Mills (supra), JTO v. Manjit Singh Baldev Singh Commission Agents (supra), Rajasthan Vanaspati Products (P) Ltd. v. Dy.

CIT (supra), JTO v. Chiianji Lal Tak (supra), Ramsaran Gupta v. Asstt.

CIT 20 Tax World 76 (Jp), Asstt. CIT v. Abril Pharmaceutical (P) Ltd. (2001) 70 TTJ (Ind) 60 : (1999) 70 JTD 206 (Ind), Kejnwala Bros. v.Asstt. CIT (1997) 60 JTD 502 (Pat), Prabhat Oil Traders v. JTO (1996) 55 TTJ (And) (TM) 122 : (1996) 56 JTD 24 (And) (TM), Balramakrish Engg.

Conctrs. Corpn. v. Dy. CIT (1996) 56 JTD 411 (Hyd), Shri Ganesh Sizing Factory v. TTO 25 Tax World 117 (Jp), ITO v. Madan Mohan Service Station 26 Tax World 186 (Jp), Rani Sati Coal Suppliers v. JTO 26 Tax World 440 (Jp), CIT v. Aggarwal Pipe Co. (1999) 240 ITR 880, 882 (Del), CIT v. Mecon Builders & Engineers (2001) 117 Taxman 246 (Del), CIT v.C.J. Rathnaswamy (1997) 223 ITR 511 (Mad), CIT v. S. Sankaran (supra), CIT v. Prithipal Singh & Co. (2001) 2491TR 670 (SC), Asstt. CIT v. Smt Geeta Devi (2001) 79 ITD 347 (Del), JTO v. Gurcharan Singh & Co. (2001) 72 TTJ (Chd) 774, Dy. CIT v. Aditya Chemicals Ltd. (2001) 70 TTJ (Del) 953, CIT v. Saran Khandsari Sugar Works (2002) 120 Taxman 319 (All) and Southern Gas Fittings (P) Ltd. v. Dy. CIT (2002) 80 JTD 202 (Chennai).

11. On the other hand, the learned Departmental Representative, while strongly relying upon the orders of the AO and the CIT(A), submitted that since the assessee was not able to substantiate his claim of loss, therefore, he agreed to be assessed at nil income before the AO and for the reasons mentioned in the order of the AO and the CIT(A), the penalty was rightly imposed by the AO and confirmed by the CIT(A) which should be upheld. .

12. We have carefully considered the rival submissions of the parties, perused the material available on record and the decisions relied upon by both the parties. The number of decisions relied upon by the learned authorised representative are discussed as under: 12.1. In CIT v. Suresh Chand Mittal (supra) affirmed by Hon'ble Supreme Court of India in (2001) 251 ITR 9 (SC) (supra) we find that in that case the revised return was filed showing higher income to buy peace whereas in the case before us no such revised return was filed, therefore, the case relied on by the learned authorised representative is not applicable.

12.2. In the case of K.P. Madhusudhanan v. CIT (2001) 251 ITR 99 (SC), it was held at p. 99 as under: "Though the assessee, a firm, had taken certain bank drafts for payments to suppliers of rice in Andhra Pradesh, it had made the entires in its accounts not on the dates on which they were obtained but a few days later. The explanation of the assessee was that sufficient cash balance was not available on those dates, it had obtained hand loans from friends, and, as it had expected to repay such loans within a short time, no entries were made in its books of account in respect thereof. The assessee also stated that since it was unable to furnish evidence for such loans it offered the amount of Rs. 93,000 as additional income. Penalty proceedings were initiated by the AO under Section 271(1)(c) of the IT Act, 1961. The AO found the assessee's explanation unacceptable, noted that it had offered the amount of Rs. 93,000 as additional income, and applying Expln. 1(B) to s, 271 imposed a penalty on the assessee. The Tribunal cancelled the penalty, inter alia, for the reason that in the notice initiating penalty proceedings the assessee was not intimated about the proposed action under Expln. l(b) to Section 271(1)(c); but the High Court, on a reference, held that the imposition of penalty was valid. On appeal to the Supreme Court : Held, affirming the decision of the High Court, that the penalty was validly levied.

The Explanation to Section 271(1)(c) is a part of Section 271. When the AO or the AAC issues a notice under Section 271, he makes the assessee aware that the provisions thereof are to be used against him. These provisions include the Explanation. By virtue of the notice under Section 271 the assessee is put to notice that, if he does not prove, in the circumstances stated in the explanation, that his failure to return his correct income was not due to fraud or neglect, he shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof, and, consequently be liable to the penalty under the section. No express invocation of the Explanation to Section 271 in the notice under Section 271 is necessary before the provisions of the Explanation are applied." It was also held that the law laid down in the case of Sir Shadilal Sugar & General Mills Ltd. (supra) is not a good law after addition of the Explanation to Section 271. Therefore, both these cases are in favour of the Revenue and against the assessee.

12.3. In the case of Shiv Lal Tak v. CIT (supra) the Hon'ble Jurisdictional High Court, while cancelling the penalty under Section 271(1)(c) has held that the enhancement in the income is neither of addition or disallowance but a case of substitution. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A). Hence, the facts of the'cited case are distinguishable and not applicable to the facts of the present case.Ess Ess Marbles (India) (P) Ltd. v. Asstt. CIT (supra), the penalty under Section 271(1)(c) was imposed on account of addition in the valuation of closing stock. However, the finally assessed income remained at a loss figure. It was found by the Tribunal that the method employed has consistently been followed and there was no concealment of income by the assessee and even otherwise the finally determined income was a loss, therefore, no penalty was exigible.

12.5. In the case of Ramsaran Gupta v. Asstt., CIT (supra) the penalty was deleted because certain amount of income has been surrendered.

12.6. In the case of CIT v. Rhone Poulence Ltd. (supra) there was a finding of the Tribunal that when the assesses conceded an ad hoc figure of under assessment under a settlement following a debated claim for depreciation, it was held by the Hon'ble High Court that this being a pure finding of fact, no substantial question of law arises. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A). Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case.

12.7. In the case of Asstt CZT v. D.N. Ghiya (supra), it was found by the Tribunal that the surrender was made prior to detection of any concealment and to buy peace and also to avoid litigation. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A). Hence, the facts of the cited case are distinguishable and not applicable to the facts ol the present case.

12.8. In the case of Asstt. CIT v. Bansiwala Iron & Steel Re-Rolling Mills (supra), there was a trading addition by application of higher gross profit rate on which the penalty for concealment of income was imposed and the same was deleted. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A).

Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case.

12.9. In the case of 1TO v. Manjit Singh Baldev Singh Commission Agents (supra), there was a conditional offer that no penalty will be levied in the case of surrender of addition. In the case before us, there was no such offer. Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case.

12.10. In the case of Rajasthan Vanaspati Products (P) Ltd. v. Dy. CIT (supra) there was an addition on estimate basis and no enquiry was made to establish the concealment. Whereas in the case before us, the loss-claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and; therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A).

Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case.

12.11. In the case of ITO v. Chiranji Lal Tak (supra), the penalty was levied on the disallowance of certain claims without proving the element of concealment. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A).

Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case.

12.12. In the case of Ramsaran Gupta v. Asstt. CIT (supra) it was held that simply on the basis of assessee's agreeing to addition, penalty cannot be sustained, Revenue must prove mens rea. Whereas in the case before us, the loss claimed was such as could not be substantiated.

Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A). Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case.

12.13. In the case of Asstt. CIT v. Abril Pharmaceuticals (P) Ltd. (supra) the declared loss was reduced to Nil. It was held that it is not a case of concealment as the assessment proceedings are different than the penalty proceedings. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A).

Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case.

12.14. In the case of Kejriwal Bros. v. Asstt. CIT (supra), the penalty was deleted as it was found that the same was imposed only on the basis of admission made by the partner and no other material was brought on record regarding the concealment of income. Whereas in the case before us, the loss claimed was such as could not be substantiated.

12.15. In the case of Prabhat Oil Traders v. ITO (supra), the penalty was deleted on the ground that the assessee's explanation had not been disproved. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A). Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case.

12.16. In the case of Balaramakrishna Engg. Contrs. Corporation v. Dy.

CIT (supra) the penalty was deleted on the ground that the additions and disallowances would not constitute concealment and the returned income arid the assessed income was a loss and there was no tax payable by the assessee. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A). Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case.

12.17. In the case of Shri Ganesh Sizing Factory v. ITO (supra) the penalty was deleted on the ground that the concealment of income has not been established before imposition of penalty and discrepancies found in the assessment are not justifiable to lead the conclusion of concealment of income. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A).

Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case.

12.18. In the case of ITO v. Madan Mohan Service Station (supra) the penalty was deleted as finally assessed loss was Rs. 7,031 after the voluntary surrender of cash credit of Rs. 61,000. Whereas in the case before us, the loss claimed was such as could not be substantiated.

12.19. In the case of Rani Sati Coal Suppliers v. ITO (supra), the penalty was deleted on the addition of cash credit. Whereas in the case before us the loss claimed was such as could not be substantiated.

12.20. In the case of CIT v. Aggarwal Pipe Co. (supra) the penalty was deleted as the Tribunal has found as a fact that the surrender of credit by the assessee during the course of assessment proceedings was bona fide. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A). Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case.

12.21. In the case of CIT v. Mecon Builders & Engineers (supra) the Hon'ble High Court, while confirming the deletion of penalty, has held that "Though it cannot be laid down as a principle of universal application that whenever an addition is made on a concession, penalty is not to be levied, the factual position in each case has to be considered and the background in which the agreement is made for the addition has to be taken note of. The fact that for the subsequent period, deduction has been granted was a relevant factor that had been duly noted by the Tribunal. In the circumstances, nothing wrong was found in the conclusion of the Tribunal cancelling the penalty".

12.22. In the case of CIT v. C.J. Rathnaswamy (supra), the penalty was deleted as the assessee did not agree for addition of cash credit on the basis that the undisclosed income was his concealed income and the decision in the case of Sir Shadilal Sugar & General Mills Ltd. v. CIT (supra) applied. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A). Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case and it was held in the case of K.P.Madhusudhan v. CIT (supra) that the law laid down in the case of Sir Shadilal Sugar & General Mills Ltd. CIT (supra) is not a good law after addition of the Explanation to Section 271.

12.23. In the case of CIT v. S. Sankaran (supra), the penalty was deleted on the ground that mere addition to the income at the instance of assessee would not warrant a finding of concealment or the levy of penalty under Section 271(1)(c) and the decision reported in (1997) 223 ITR 5 (Mad) (supra) was followed. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A), Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case.

12.24. In the case of CIT v. Prithipal Singh & Co. (1990) 183 ITR 69 (P&H), it was held by the Hon'ble High Court that in the case of loss, penalty cannot be imposed. The Hon'ble Supreme Court in (2001) 249 ITR 670 (supra) has affirmed the said decision. However, it has been held in the case of P.R. Basavappa & Sons v. CIT (2000) 243 ITR 776 (Kar) that the decision in (1990) 183 ITR 69 (P&H) is in respect of the asst.

yr. 1970-71, i.e., before insertion of the Explanation. Therefore, keeping in view the law laid down by the Hon'ble Supreme Court in (2001) 251 ITR 99 (SC) (supra), the case relied upon by the learned authorised representative, with due respect, is not applicable to the facts of this case as the present case is after the addition of Explanation to Section 271.

12.25. In the case of Asstt. CIT v. Smt. Geeta Devi (supra), the penalty was deleted on the ground that mere addition to income at the instance of assessee would not warrant a finding of concealment or the levy of penalty under Section 271(1)(c). Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A). Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case.

12.26. In the case of ITO v. Gurcharan Singh & Co. (supra), it was held that mere fact that the assessee had accepted the addition would not, by itself, justify imposition of penalty under Section 271(1)(c) because penalty proceedings are distinct and different. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A). Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case.

12.27. In the case of Dy. CIT v. Aditya Chemicals Ltd. (supra), the assessment in this case was completed at a reduced figure of loss. The Tribunal, while cancelling the penalty, has followed the decision of Hon'ble Supreme Court in the case of Prithipal Singh & Co. (supra).

Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A). Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case. Further, in the case of P.R. Basavappa & Sons v. CIT (supra), it was held that the decision in CIT v. Prithipal Singh & Co. (supra) is in respect of asst. yr. 1970-71, i.e., before insertion of the Explanation. Therefore, this case is also not applicable to the facts of the assessee's case.

12.28. In the case of CIT v. Saran Khandsar Sugar Works (supra), the finding that the assessee had agreed to a higher assessment on the condition that no penalty would be imposed, was a finding of fact.

Similarly, the finding that no actual concealment was established was also a finding of fact and, therefore, the assessee would be held to have discharged the onus under the Explanation to Section 271(1)(c).

Accordingly, the Tribunal was justified in cancelling the penalty.

12.29. In the case of Southern Gas Fittings (P) Ltd. v. Dy. CIT (supra), it was held that simply on the basis of assessee's agreeing to addition, penalty cannot be sustained, Revenue must prove mens rea.

Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A). Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case.

13. With this we find that there is no dispute that during the course of assessment proceedings, the assessee has offered to surrender the loss claimed at Rs. 36,80,600 and agreed to be assessed at Nil income and the AO according to the offer made by the assessee has completed the assessment at Nil income. We also find that the assessee at no stage of assessment proceedings or penalty proceedings has neither proved that the loss suffered by him is true, fair and genuine nor has submitted any explanation that the claim of loss is verifiable from the books of accounts and vouchers including the stock register. The assessee has only contended that the surrender of loss was on agreed basis to avoid further litigation and to purchase peace. In the penalty, the assessee has not produced the books of accounts in order to justify his claim of loss. The assessee's explanation that the surrender of loss was on agreed basis was not found acceptable by the AO and the CIT(A) while holding that there is a concealment of income.

Clearly, therefore, it is a case that comes under Section 271(1)(c), Expln. 1 thereof which provides that in a case where the explanation is offered which is found by the AO to be false or no explanation is offered or an explanation is offered which could not be substantiated the amount added in computing the total income of such person shall be deemed to represent the income in respect of which particulars have been concealed. In this case, the AO found that the assessee has not substantiated his claim of loss and proceeded to impose the penalty which was upheld by the CIT(A). Since the assessee was unable to furnish any evidence in support of his claim of loss and without filing any revised return of income, he offered to be assessed at nil income, therefore, keeping in view that the loss claimed was such as could not be substantiated and in the absence of any contrary material against the finding of the CIT(A) and also respectfully following the decision of apex Court in (2001) 251 ITR 99 (SC) (supra) no error is found in the order of the CIT(A) confirming the levy of penalty under Section 271(1)(c) and, accordingly, the order of the CIT(A) is upheld.1. Unable to concur with the finding and conclusion arrived at by my learned brother I record my dissent and proceed to pass a separate order as under: 2. The assessee is an exporter and his income is exempt under Section 80HHC of the Act. Accounts of the assessee are duly audited. The return is accompanied with the report of auditors under, Sections 44AB and 80HHC of the Act. The assessee returned loss of Rs: 36,80,600. The assessment was completed after examination of books of account. The AO was also satisfied that required details have been filed by the assessee and finding to this effect has been recorded in the assessment order. However, the assessee agreed to complete the assessment at NIL income. It is pertinent to mention here that the loss of Rs. 36,80,600 was returned by the appellant after claiming set off for an income of Rs. 69,138 from other sources. It is thus the assessment at nil income was a result of net loss of Rs. 69,138 as against returned loss of Rs. 37,40,738 under the head income from business or profession. This amount of loss finally came to be set off against the income of Rs. 69,138 from other sources. The AO is not found to have recorded any finding nor his satisfaction during the course of assessment proceedings that the assessee has concealed the particulars of his income or furnished inaccurate particulars of such income. He, however, proceeded to initiate penalty proceedings under Section 271(1)(c) of the IT Act, 1961. The appellant filed a reply on 15th March 2000, to the show-cause notice, rendering its explanation that the appellant had a low gross profit margin and there was a net loss is manufacturing and trading account. The addition thus was on trading account and assessment came to be completed on agreed basis at nil income. Another reply of the assessee dt. 8th Aug., 2000, states that the assessee agreed to surrender its loss to avoid further litigation and to purchase peace.

3. In her penalty order for imposing penalty of Rs. 14,45,240 the AO has observed that during the course of assessment proceedings the assessee was asked to explain the reason for the loss but he could not substantiate the same. Such an observation of the AO is perverse to the facts. No such findings were recorded at the time of completion of assessment by the AO. In fact the assessment order shows that required details have also been filed. Assessee vide his letter dt. 20th Sept., 1999, enclosed a statement of reasons for incurring losses by it. This read as under: "1. It is one of the crucial facts that the garment industry began to face hard time due to global slump. Due to the slump in the overseas markets, exporters' profit margin rapidly declined. There was 6 per cent fall in export of garments in the first 8 months of the same year.

2. In the same year, the national Governments of some countries banned on using azo-dyes which were used earlier in processing of fabrics. We had good business in Germany and was expecting better export value in 1996-97, but due to ban on azo-dyes, we could not retain our business in Germany.

3. There is a universal practice that once the deal (order/contract) get finalised, one cannot gear back himself for any reason. In the same year, after making final commitment to the buyer, the cost of raw materials increased, which lowered the profit margin and ultimately caused loss.

4. Meanwhile the other cost affecting factors such as salary, labour, printing, bank interest, etc. also jumped and reduced the profit. To increase the production capacity, company began to use the imported machinery. Therefore, the company had to employ some additional staff. It resulted the adverse effect on profit.

Once stood still at Singapore during the transaction. We had to airlift the cargo (under invoice No. KM/58) from Singapore to New York In this case, company had to pay 3 + lakhs as air freight otherwise according to clause in above L/C, The freight was liable to pay at destination (buyer). Our company had lodged a case against the freight carrier company (M/s Natvar Pareekh Industries, Jaipur) for the default in services and asked to return the amount with interest. The case is yet to be decided by the Hon'ble Court.

6. It was our misfortune that all bulk orders procured were in stock-fabrics with waifer thin margin. As the fabric was not fresh, production and finishing time got doubled and on the other hand, labour cost, factory overheads, bank interest burden diminished our profit margin." 4. The assessee again filed a letter stating further reason for loss as under : "(i) There is gross loss of Rs. 19.89 lacs in trading account. Major loss is loss in trading. As given earlier point 6 of reason of losses the loss is due to defective fabrics. The fabric was got doubled in production and was rejected, this caused in gross loss.

(ii) Bank interest during current year is Rs. 7.26 lakh instead of Rs. 2.48 lakh in previous year." It is thus while completing the assessment the AO did not hold that the assessee did not substantiated the loss. Saying so in the penalty order that loss was not substantiated was whimsically on the part of the AO.There is no fairness in her order. Record reveals that none of the reason advanced by the appellant was found false. The particulars of income furnished by the appellant were also not found inaccurate. No mistake or error in the books of account and the return filed was found or detected by the AO. No claim was found to have been made wrongly.

What investigation was made by the AO is not borne out from the record.

Results of any investigation have also not been brought on record nor the appellant was confronted with the same, It was also, therefore, wrong on the part of the AO in saying in the penalty order that the assessee surrendered the loss only when deep investigation was started and he had no explanation to offer for the loss. The AO has also erred in stating that there was no loss in the business and the assessee had fraudulently claimed it. There is no material before the AO for giving such a finding. Allegation of fraud is without any basis or material on record. Even after making the assessment at nil income, loss from business stand accepted at Rs. 69,138. This has gone to equalise the income of Rs. 69,138 from other sources and brought the assessment to no income. The assessee is nowhere found to have accepted or admitted that he is not in a position to substantiate the claim for any of the expenses. He even did not express his inability to give such an explanation. The accounts have also not been rejected. The AO did not say that he is not satisfied about the correctness or completeness of the accounts maintained by the assessee nor did he show his inability to deduce the profits from business. No defects were pointed out nor any deviation found in the method of accounting employed during the year. No sale or purchase were doubted. Complete quantitative tally was available on record. No enquiry was made neither in the assessment proceedings nor in penalty proceedings for alleging the claim as fraudulent. Stating fraudulent claim as a fact in her penalty order is absolutely wrong, contrary to the facts and without any basis or material on record.

I have also perused the show-cause notice issued by the AO. At no stage of the proceedings the assessee was asked to explain the manufacturing defect. Holding that the assessee could not even explain the manufacturing defect is, therefore, without any basis or material on record and is thus erroneous. I am, therefore, satisfied that there was no such basis for formation of any opinion by the AO in penalty proceedings that the assessee had not file the true particulars of his income.

5. The AO in para 3 of the penalty order has also observed that since the assessee had furnished inaccurate particulars of income, penalty proceedings under Section 271(1)(c) of the IT Act, 1961, were initiated. This he presumed to be the basis for issuing show-cause notice to the assessee. The premise on which the AO is found to have proceeded is not founded on record and there is nothing from which it could be said that the assessee had furnished inaccurate particulars of income. Penalty, therefore, could not have been imposed.

6. Presuming but not accepting that proceedings were initiated correctly, then also the proceedings are stated to have been initiated for inaccurate particulars of his income alone and not for concealing the particulars of such income. The AO did not find nor did she enquire as to which of the particulars of his income was inaccurate but because she entertained a subjective opinion for the fraudulent claim, she proceeded to hold that as stated above, the assessee had furnished inaccurate particulars of income and concealed his income to the extent of Rs. 36,80,600 as surrendered. The learned Departmental Representative did not provide any material nor made reference to any such material which was in the possession of the AO for entertaining any such opinion or for coming to such a conclusion. In fact there was no material or basis for holding that the assessee has furnished inaccurate particulars of income and concealed his income to the extent of Rs. 36,80,600 as surrendered. In fact she appears to have come to a conclusion that inaccurate particulars were filed merely because there was a surrender of loss and not otherwise. The offer to surrender was for loss to the extent to assess it at Nil income. It did not say that the income was concealed or that the particulars of income so furnished are not accurate. The assessee did not express his inability to substantiate the loss which in fact was supported by reasons and stood duly substantiated and supported by the genuine vouchers. The affidavit filed by the assessee before the authorities below also reveals that the assessee attended before the AO on 14th Feb., 2000, in the penalty proceedings in response to a telephonic call from the office of AO and it is after discussion with the then AO he felt persuaded to accept the assessment at Nil income as it would result is to financial implications at all. It was also deposed by the assessee in the affidavit that he had foregone the loss to avoid protracted proceedings and to purchase peace, particularly when no financial burden was to come. It has further been deposed that he attended the proceedings without the company of his legal advisor and could not even remotely envisage any penalty situation in the circumstances, particularly when every fine details were submitted during the earlier hearings by his counsel. The said affidavit appears to have been sent to the AO for obtaining a remand report but no contrary material thereto has been brought by the AO in the remand report dt. 7th/9th Feb., 2001, sent to the learned CIT(A) under her letter No. 1157. The AO in the remand report merely expressed her opinion which was not a result of any material available on record nor found from any of the enquiry conducted by her or her predecessor. This was her subjective opinion and not satisfaction as required under Section 271(1)(c) of the IT Act, 1961, for imposing the penalty. Since complete details were available and assessee did not agree of concealed income, nor that he had furnished inaccurate particulars, the assessee appears to have been persuaded to have agreed to be assessed at Nil income, this too because he entertained a bona fide belief that there will be no financial burden on his and could not even remotely envisage any penal situation.

Under such glaring facts and circumstances there was no necessity or occasion nor any time available with him to file a revised return. I am, therefore, satisfied that the assessee entertained a bona fide belief that mere agreeing to be assessed at nil income would not amount to concealment of income or furnishing of inaccurate particulars of such income by him besides his explanation being bona fide and all the facts relating to the same and material to the computation of income have been disclosed by him and also that the failure to return the correct income did not arise from any fraud or neglect on his part, The surrender of loss appears to be under a good faith and the same cannot, therefore, be equated with the concealment of income nor can it be regarded as furnishing of inaccurate particulars by the assessee. The Department has not discharged the burden of proving concealment or furnishing inaccurate particulars by the assessee but simply rested its conclusion on the surrender made by the assessee in good faith. Under such warranting circumstances and the findings as recorded hereinbefore, no penalty could have been imposed on the assessee. My view also finds support from the decision of apex Court in the case of CIT v. Suresh Chand Mital (2001) 251 CIT 9 (SC). In view of the facts and findings and in law there was no justification in the order of the learned CIT(A) to confirm the penalty. I, therefore, hold that the learned CIT(A) has erred in confirming the penalty of Rs. 14,45,240.

The same is, therefore, directed to be deleted.

As there is a difference of opinion between the Members, the same is required to be resolved by one or more Members of the Tribunal as nominated by the Hon'ble President, ITAT in terms of Section 255(4) of the IT Act.

"Whether, on the facts, findings and in law there was any justification in confirming the penalty of Rs. 14,45,240 imposed under Section 271(1)(c) of the IT Act, 1961." 2. We direct the registry to place the matter before the Hon'ble President ITAT.1. The following further question of difference may also be referred to the Hon'ble President, ITAT in terms of Section 255(4) of the IT Act, 1961 : "Whether, while deciding this appeal, reasons of loss as mentioned "in the assessee's letter dt. 20th Sept., 1999, can be considered as good reasons which could not be substantiated by the assessee at any stage of hearing either before the AO, CIT(A) or before the Tribunal and to avoid deep scrutiny/investigation, he offered to surrender the loss in the assessment proceedings." 1. The Hon'ble President has referred the following question to the undersigned under Section 255(4) of the IT Act on account of difference between the Hon'ble Members of Jaipur Bench of Tribunal: "Whether, on the facts, findings and in law there was any justification in confirming the penalty of Rs. 14,45,240 imposed under Section 271(1)(c) of the IT Act, 1961." Both the Hon'ble Members agreed for reference of above question.

However, another question has been sought to be referred at the instance of Hon'ble JM : "Whether, while deciding this appeal, reasons of loss as mentioned in the assessee's letter dt. 20th Sept., 1999, can be considered as good reasons which could not be substantiated by the assessee at any stage of hearing either before the AO, CIT(A), or before the Tribunal and to avoid deep scrutiny/investigation, he offered to surrender the loss in the assessment proceedings." 2. I have heard both the parties on above questions. There was no difference of opinion that question No. 1 is a comprehensive question and covers the aspect emphasized in the separate question suggested by the learned JM. In fact, the proposed question is part of the finding of the learned JM which is supported by the Revenue. Therefore, arguments are required to be considered for disposing the matter referred to me.

3. The facts of the case are that the assessee for the asst. yr.

1997-98 submitted the return of income on 29th Oct., 1997, declaring a loss of Rs. 36,80,600, The assessee derived income from export of garments and was entitled to deduction under Section 80HHC of the IT Act. But the above deduction was not claimed as it was a case of loss.

The detail of income disclosed by the assessee is as under: The AO took assessment and raised several queries which I shall refer to in detail a little later. Ultimately, the assessee agreed that income be taken at nil. The AO accordingly, vide order dt. 15th Feb., 2000, took the income at nil. The assessment order is a brief order and is reproduced here in below : "Return of income was filed on 29th Oct., 1997 declaring loss of Rs. 36,80,600. Notice under Section 143(2) of the IT Act issued and served upon the assessee in response to which V.K. Gupta, C.A. and authorised representative of the assessee attended from time to time. Books of accounts produced which have been examined on test check. Required details have also been filed and case has been discussed.

The assessee is deriving income from export of garments. During the course of assessment proceedings, the assessee has offered to surrender the loss claimed at Rs. 36,80,600 and agreed to complete the assessment on nil income. Therefore, the assessment is completed on nil income.

Assessed. Issue necessary, forms. Give credit of prepaid taxes, if any, after due verification. Penalty proceedings under Section 271(1)(c) are initiated separately." The AO initiated penalty proceedings under Section 271(1)(c) of the IT Act.

4. In his written reply dt. 15th March, 2000, to the show-cause notice under s, 271(1)(c), the assessee stated that the assessment was completed on nil income on agreed basis. It was requested that penalty proceedings may be dropped. The assessee relied upon certain case law.

The AO held that the case law relied upon by the assessee was not applicable to the facts of the case before her and, therefore, arguments of assessee were not acceptable. It is further observed in the penalty order that the assessee surrendered the loss only when deep investigation was started and he has no explanation to offer for the loss. It is stated that the assessee had fraudulently claimed the loss which he ultimately surrendered, The assessee could not even explain manufacturing defect as claimed. Accordingly, penalty of Rs. 14,45,240 which represented 100 per cent of tax sought to be evaded was imposed under Section 271(1)(c) of the IT Act with the approval of Dy. CIT, Circle-2, Jaipur. The penalty order bears dt. 30th Aug., 2000.

5. The assessee impugned the above levy in appeal before the CIT(A) but remained unsuccessful. Accordingly, the levy was further agitated in appeal before the Tribunal. After hearing the appeal, the learned JM agreed with the finding of learned CIT(A) and upheld the levy. The learned AM did not agree with the above view. As per separate reasons, the learned AM held that the learned CIT(A) has erred in confirming penalty of Rs. 14,45,240. He directed that penalty be deleted. On account of above difference between the Members, the matter has been referred to me by the Hon'ble President of Tribunal, under Section 255(4) of the IT Act.

6. The facts of the case as reflected in separate orders of the learned Members are discussed hereinbelow.

7. The learned JM first noted the plea raised by the assessee in response to show-cause notice issued under Section 271(1)(c) of the IT Act and how it was rejected by the AO. He then recorded submission of the assessee in appellate proceedings before the CIT(A). It is noted that the assessee had contended that except for rejection of explanation of the assessee, no specific enquiry into the correctness, truthfulness, accuracy of particulars furnished by the assessee was gone into nor any concealment proved. The penalty was sought to be cancelled on the basis of decisions of different High Courts and of various Benches of Tribunal as are noted at pp. 4 to 5 of his order.

The assessee further filed an affidavit before the CIT(A) stating therein that in response to a telephonic call, the assessee agreed to make a surrender to be assessed at nil income in order to avoid protracted proceedings and to purchase peace particularly when no financial burden was involved. The attendance of the assessee was without his legal advisor and so he could not visualize the situation when he would have to face penalty. The learned JM then noted the following findings of the learned CIT(A) in paras 2.8 and 2.9 of the order reproduced as below : "2.8. In view of the above position, I do not find the argument given to be acceptable. The facts as enumerated by me above, show that the loss claimed was such as could not be substantiated.

Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claimed damage to stock. The appellant also could not provide any evidence at any stage in support of the claim that either stock was damaged or orders cancelled or that such damaged stock was sold locally in the market at lower than normal rates. It is also not acceptable that AO has merely rejected the Explanation of the appellant so that imposition of penalty is not justified. The assessee has not been able to prove its claim of loss for the reasons given by him in assessment proceedings nor in the appellate proceedings. It is also not an acceptable argument that assessee agreed to surrender merely to purchase peace and, therefore, imposition of penalty was not justified. In view of the decision of the Hon'ble Supreme Court in the case of Union of India v. Banwari Lal Agarwal, (1999) 238 ITR 461 (SC), it has been categorically held that there is no provision in the Act sanctioning compromise with the assessee by the IT Department that no penal action would be undertaken. Therefore, it cannot be held that the assessee having agreed to surrender, no penalty action should have been taken.

2.9. The position of law relating to concealment stands changed after insertion of Explanation to Section 271(1)(c). Therefore, in view of decision in the case of B.A. Balasubramanian & Bros. Co. v. CIT (1999) 236 ITR 977 (SC) the earlier decision in the case of Anwar Ali is no longer good law and AO is not required to prove mens rea on the part of the appellant. Since it has become clear that assessee claimed a loss which it was not in position to substantiate nor was there any verifiable evidence in support of the claim, there is no doubt that appellant has furnished inaccurate particulars of income and concealment of income in that year to the extent of such excessive loss claimed. It is not a justified argument that the claim of the assessee has been disallowed but that assessee does not have any evidence to support the claim made. Under the circumstances, the imposition of penalty was justified and the same is confirmed being reasonable at the minimum amount imposed." 8. The learned JM, after considering the submission of the assessee and that of learned Departmental Representative, considered and discussed the following cases : (i) CIT v. Suresh Chand Mittal (2000) 241 ITR 124 (MP) affirmed by Hon'ble Supreme Court in CIT v. Suresh Chand Mittal (2001) 251 ITR 9 (SC). The said case was distinguished as revised return was filed in that case, whereas no revised return was filed in this case by the assessee.

The above case was held to be in favour of the Revenue and not of the assessee.

This case was also distinguished on the ground that claim of loss made in the return was not substantiated here. The Explanation given by the assessee in this regard was only general. The stock register was not maintained and claim of damaged stock could not be verified.Ess Ess Marbles India (P) Ltd. v. Asstt. CIT 24 Tax World 352 (Jp); (viii) Asstt. CIT v. Bansiwala Iron & Steel Re-Rolling Mills, 21 Tax World 533 (Jp); (ix) ITO v. Manjit Singh Baldev Singh Commission Agents (1999) 65 TTJ (Asr) 400 : (1999) 69 ITD 197 (Asr); (x) Rajasthan Vanaspati Products (P) Ltd. v. Dy. CIT 20 Tax World 266 (Jp); (xiii) Asstt. CIT v. Abril Pharmaceuticals (P) Ltd. (2001) 70 TTJ (Ind) 60 : (1999) 70 ITD 206 (Ind); (xv) Prabhat Oil Traders v. JTO (1996) 55 TTJ (Ahd)(TM) 122 : (1996) 56 ITD 24 (Ahd)(TM); (xvi) Balaramakrishna Engg. Contrs Corporation v. Dy. CIT (1996) 56 ITD 411 (Hyd); (xxviii) CIT v. Saran Khandsar Sugar Works (2002) 120 Taxman 319 (All); and (xxix) Southern Gas Fittings (P) Ltd. v. Dy. CIT (2002) 80 ITD 202 (Chennai).

9. All the above cases were distinguished on the ground that in the present case, the assessee did not substantiate the loss claimed by producing supporting material. The matter was taken as covered against the assessee as per Explanation to Section 271(1)(c) of the IT Act. The onus on the assessee was not discharged.

"With this, we find that there is no dispute that during the course of assessment proceedings, the assessee has offered to surrender the loss claimed at Rs. 36,80,600 and agreed to be assessed at nil income and the AO according to the offer made by the assessee has completed the assessment at nil income. We also find that the assessee at no stage of assessment proceedings or penalty proceedings has neither proved that the loss suffered by him is true, fair and genuine nor has submitted any explanation that the claim of loss is verifiable from the books of accounts and vouchers including the stock register. The assessee has only contended that the surrender of loss was on agreed basis to avoid further litigation and to purchase peace. In the penalty, the assessee has not produced the books of accounts in order to justify his claim of loss. The assessee's explanation that the surrender of loss was on agreed basis was not found acceptable by the AO and the CIT(A) while holding that there is a concealment of income. Clearly, therefore, it is a case that comes under Section 271(1)(c), Expln. 1, thereof which provides that in a case where the Explanation is offered which is found by the AO to be false or no explanation is offered or an explanation is offered which could not be substantiated the amount added in computing the total income of such person shall be deemed to represent the income in respect of which particulars have been concealed. In this case, the AO found that the assessee has not substantiated his claim of loss and proceeded to impose the penalty which was upheld by the CIT(A). Since the assessee was unable to furnish any evidence in support of his claim of loss and without filing any revised return of income, he offered to be assessed at nil income, therefore, keeping in view that the loss claimed was such as could not be substantiated and in the absence of any contrary material against the finding of the CIT(A) and also respectfully following the decision of apex Court in K.P. Madhusudhanan v. CIT (2001) 251 ITR 99 (SC) no error is found in the order of the CIT(A) confirming the levy of penalty under Section 271(1)(c) and, accordingly, the order of the CIT(A) is upheld." 11. The learned AM did not concur with the finding of the learned JM.After noting briefly the facts of the case, the reply of the assessee and the fact that the assessee surrendered the loss to avoid litigation, it is noted that penalty of Rs. 14,45,240 was imposed. He has referred to the observations of the AO in the penalty order that during the course of assessment proceedings, the assessee was asked to explain the reason for loss but he could not substantiate the loss claimed. According to the learned AM no such finding was recorded at the time of completion of the assessment by the AO. In fact, in the assessment order, it was noted that the required details were filed.

The learned AM further noted that in his letter dt. 20th Sept., 1999, the assessee gave reasons for having suffered losses. Those are reproduced by the learned AM as under: "1. It is one of the crucial facts that the garment industry began to face hard time due to global slump. Due to the slump in the overseas markets, exporters' profit margin rapidly declined. There was 6 per cent fall in export of garmentsin the first 8 months of the same year.

3. There is a universal practice that once the deal (order/contract) get finalized, one can not gear back himself for any reason. In the same year, after making final commitment to the buyer, the cost of raw materials increased, which lowered the profit margin and ultimately caused loss.

Once stood still at Singapore during the transaction. We had to airlift the cargo (under invoice No. KM/58) from Singapore to New York. In this case, company had to pay 3+lakhs as air freight otherwise according to clause in above L/C the freight was liable to pay at destination (buyer). Our company had lodged a case against the freight carrier company (M/s Natvar Pareekh Industries, Jaipur) for the default in services and asked to return the amount with interest. The case is yet to be decided by the Hon'ble Court, 6. It was our. misfortune that all bulk orders procured were in stock-fabrics with waiter thin margin. As the fabric was not fresh, production and finishing time got doubled and on the other hand, labour cost, factory overheads, bank interest burden diminished our profit margin," "4. The assessee again filed a letter stating further reason for loss as under: "(i) There is gross loss of Rs. 19.89 lacs in trading account. Major loss is loss in trading. As given earlier point 6 of reason of losses the loss is due to defective fabrics. The fabric was got doubled in production and was rejected, this caused in gross loss.

(ii) Bank interest during current year is Rs. 7.26 lakhs instead of Rs. 2.48 lakhs in previous year." 12. The learned AM further observed, that in the assessment order, the AO did not hold that the assessee did not sustantiate the claim of loss. Saying so in the penalty order did not advance the case of the Revenue. It is further observed that none of the reasons given by the assessee was found to be false. No inaccurate particulars were found, nor any error was detected in the books of account maintained by the assessee. What investigation was made by the AO, is not borne out from the record. Result of any investigation is neither available on record, nor shown to be confronted to the assessee. The learned. AM, accordingly, observed that it was wrong on the part of the AO to say in the penalty order that the assessee surrendered the loss only when deep investigations were started and he had no explanation to offer for the loss. There was no material before the AO to record the finding in the penalty order that the loss in business was fraudulently claimed. The learned AM further held that the loss to the extent of Rs. 69,138 has been allowed when the income was taken at nil. It is further observed that the assessee nowhere admitted or expressed his inability to explain the loss. The books of account have not been rejected. No finding that books of account maintained were incorrect or incomplete, was recorded in the assessment order. No sale or purchase is shown to be doubted. Complete quantitative tally was available on record. No enquiry was made either in assessment proceedings or in penalty proceedings for holding that the claim of the assessee was fraudulent.

The finding of fraudulent claim in the penalty order was contrary to record. The learned AM further observed that the finding that the assessee could not even explain the manufacturing defect is contrary to record and without any basis. No satisfaction was recorded by the AO that the assessee did not file true particulars of his income. The learned AM also took into account the affidavit of the assessee explaining how through a telephonic call from the office of the AO, the assessee was persuaded to accept the assessment at nil income as the same involved no financial implication. The learned CIT(A) had also obtained a remand report from the AO which was sent vide letter No.2257, dt. 7th/9th Feb., 2001. However, in the remand report, the AO merely expressed her opinion which was not result of any material available on record. The opinion expressed was her subjective opinion and not satisfaction as required under the statutory provisions.

"Since complete details were available and assessee did not agree of concealed income nor that he had furnished inaccurate particulars, the assessee appears to have been persuaded to have agreed to be assessed at Nil income, this too because he entertained a bona fide belief that there will be no financial burden on him and could not even remotely envisage any penal situation. Under such glaring facts and circumstances, there was no necessity or occasion nor any time available with him to file a revised return. I am, therefore, satisfied that the assessee entertained a bona fide belief that mere agreeing to be assessed at nil income would not amount to concealment of income or furnishing of inaccurate particulars of such income by him besides his explanation being bona fide and all the facts relating to the same and material to the computation of income have been disclosed by him and also that the failure to return the correct income did not arise from any fraud or neglect on his part. The surrender of loss appears to be under a good faith and the same cannot, therefore, be equated with the concealment of income nor can it be regarded as furnishing of inaccurate particulars by the assessee. The Department has not discharged the burden of proving concealment or furnishing of inaccurate particulars by the assessee but simply rested its conclusion on the surrender made by the assessee in good faith. Under such warranting circumstances and the findings as recorded hereinbefore, no penalty could have imposed on the assessee. My view also finds support from the decision of apex Court in the case of CIT v. Suresh Chand Mittal (2001) 251 ITR 9 (SC). In view of the fact and findings and in law there was no justification in the order of the learned CIT(A) to confirm the penalty. I, therefore, hold that the learned CIT(A) has erred in confirming the penalty of Rs. 14,45,240. The same is, therefore, directed to be deleted." 13. In the above background, the Hon'ble Members disagreed and accordingly the matter has been referred to me.

14. I have heard both the parties. The learned counsel appearing for the assessee supported the proposed order of the learned AM. It has been contended that case-law cited on behalf of the assessee was fully applicable to the facts of the case and was not distinguishable. It was emphasized that the AO in the assessment order did not whisper that the loss claimed was fraudulent. In fact, no independent enquiry was made, nor the books of account were rejected. It was further contended that the learned CIT(A) introduced new grounds e.g., manufacturing defects, heavy printing and stitching expenses with which the assessee was never confronted during the course of the assessment proceedings. Other observations of CIT(A) are contrary to record.

15. The orders of the Revenue authorities levying penalty were also assailed as bad in law as no satisfaction was recorded during the course of assessment proceedings about concealment of income or furnishing of inaccurate particulars of income under Section 271(1)(c) for initiating of valid penalty proceedings. The assessee relied upon the following decisions : 16. The learned counsel also assailed levy of penalty as no tax was found to be payable on nil assessed income. In this connection, reliance was placed on decision of Rajasthan High Court in the case of CIT v. Harshvardhan Commercials & Minerals Ltd. 28 Tax World 374 (Raj), as also on the decision of Punjab & Haryana High Court in the case of CIT v. Prithipal Singh & Co. (supra) which was confirmed on appeal by the Hon'ble Supreme Court in the case of CIT v. Prithipal Singh & Co.

(2001) 249 ITR 670 (SC). The assessee also relied upon several other decisions including the decision of Hon'ble Madras (sic-Kerala) High Court in the case of CIT v. N. Krishnan; (1999) 240 ITR 47 (Ker) and also on the decision of Rajasthan High Court in the case of RSEB v. Dy.

CIT (1993) 200 ITR 434 (Raj).

It was further contended by the learned counsel that if two reasonable views of the matter are possible, the view favourable to the assessee has to be adopted. Reliance in this connection was placed on the decision of Hon'ble Supreme Court in the case of CIT v. Vegetable Products Ltd. (1973) 88 ITR 192 (SC). The learned counsel also tried to distinguish the decision of Karnataka High Court in the case of P.R.Basavappa & Sons v. CIT (2000) 243 ITR 776 (Kar) by pointing out that the starting words in Section 271(1)(iii) i.e. "in addition to any tax payable" were there all along both in asst. yr. 1970-71 as also in asst. yr. 1991-92, The tax evasion was held sine qua non for imposition of penalty and this position held good even in asst. yr. 1997-98. It is further pointed out that the Hon'ble Punjab & Haryana High Court though concerned with asst. yr, 1970-71 when Explns. 3 and 4 to Section 271(1)(c) were not there, yet implication of above Explanations was duly considered by the Court and this decision was approved by the Hon'ble Supreme Court. Therefore, the Revenue could not get any assistance from the decision of Hon'ble Karnataka High Court. The assessee further placed strong reliance on the affidavit of the assessee filed before the CIT(A) explaining the circumstances under which the assessee agreed to get assessed at nil income.

17. The learned counsel for the assessee tried to distinguish the decision of Hon'ble Supreme Court in the case of K.P. Madhusudan (supra) by pointing out that' in the said case, the assessee was unable to furnish any evidence in support of his claim and had surrendered the amount treated as concealed income after he was caught by the Revenue authorities. The facts in the present case are very different. The assessee relied upon the decision of Hon'ble Supreme Court in the case of Suresh Chand Mittal (supra) to contend that surrender made during the assessment proceedings could not be taken as sole basis for levy of penalty under Section 271(1)(c).

18. Shri Chopra, the learned Departmental Representative, on the other hand, supported the proposed order of the learned JM. It was contended that all the relevant and material facts of the case have been considered by the learned JM in 23 pages in the proposed order. He has further considered all the decisions cited by both the parties. The penalty order of CIT(A) is liable to be confirmed on account of decision of Hon'ble Supreme Court in the case of K.P. Madhusudan (supra).

19. The learned Departmental Representative further tried to support the proposed order of learned JM by referring to certain facts noted in the proposed order of the Hon'ble Members as under: "(I) On p.-1 (para-2), the Hon'ble Member has observed that the income of the assessee is exempt under Section 80HHC of the Act, accounts are duly audited, the return is accompanied by auditors' report under Sections 44AB and 80HHC and assessment was completed after examination of books of accounts. The assessee claimed loss of Rs. 36,80,600. All these facts were also verified by the assessee while signing the verification in the return of income on 25th Oct., 1997 (copy enclosed). He also made specific notes below the computation of total income.

(i) Loss carried forward to be set off in future profit Rs. 36,80,600.

(ii) The assessee made export sales but deduction under Section 80HHC is not applicable due to assessee. He fulfils other conditions entitled under Section 80HHC benefits.

(iii) However, the assessee ignoring all the veracity of the accounts, surrendered the entire loss claim to nil after attending certain hearings before the AO (evident from the copies of order sheet entries enclosed) and furnishing certain details. This raises following issues to be looked into : (a) Why the assessee surrendered the loss claim of Rs. 36,80,600 when he claimed and verified in the return of income (b) Why did he not rely on his audited books of account counsel for the assessee, auditors' report, etc.? (iv) Therefore, this is not correct that the claim was on the basis of books of account counsel for the assessee, he maintained, the verification he did in the return of income.

(v) The Hon'ble Member (AM) has also observed that the AO has not recorded his satisfaction for furnishing the inaccurate particulars of income and concealed the income. Since the assessee himself surrendered, nothing remained for the AO to get satisfied more than that." Shri Chopra further contended that both the learned Members in their respective orders, relied upon the decision of Hon'ble Supreme Court in the case of CIT v. Suresh Chand Mittal (supra). However, he submitted that the above decision was not applicable to the facts of the case. In the said case, the assessee filed revised return after search and seizure and offered higher income and returns were regularized under Section 148. In the present case, no revised return was filed and verification done in the return of income for claiming loss has been found to be false and untrue. Therefore, the decision of Hon'ble Supreme Court is not applicable. Shri Chopra further compared the two cases of Supreme Court reported in (2001) 251 ITR 9 (SC) (supra) and (2001) 251 ITR 99 (SC) (supra) to emphasize that the decision in the case of K.P. Madhusudan was of later date and fully applicable to the facts of the case. The learned Departmental Representative placed strong reliance on the proposed order of Hon'ble JM. He also placed on record copy of order-sheet entries made during the course of assessment proceedings to emphasize that claim of loss was not established. The assessee was not able to reply to all the queries raised by the AO. The learned Departmental Representative also placed on record copy of decision, of Hon'ble Rajasthan High Court in the case of CIT v. Mohd.

Mohtram Farooqui (2002) 125 Taxman 164 (Raj) to justify the levy of penalty.

20. I have given careful thought to the proposed order of my learned brothers, arguments of parties and material available on record. I would like to take up legal and technical submissions advanced on behalf of the assessee opposing levy of penalty. The first legal submission which I would like to consider, relates to non-recording of satisfaction by the AO in the course of the assessment proceedings, before initiating proceedings under Section 271(1)(c) of the IT Act.

The learned AM had made a reference to the fact that the satisfaction in accordance with law has not been recorded. The leafned counsel for the assessee further argued that initiation of penalty proceedings was bad in law as the AO failed to record satisfaction about concealment of income or furnishing of inaccurate particulars of income. He referred to two decisions, one of Hon'ble Delhi High Court and another of Punjab & Haryana High Court, referred to hereinbelow. The learned AM has not said anything on this aspect of the matter, nor the learned Departmental Representative. The learned Departmental Representative also did not address on this aspect of the matter.

21. In the case of CIT v. Ram Commercial Enterprises Ltd. (supra) their Lordships of Delhi High Court, after considering decision of their Lordships of Hon'ble Supreme Court in the case of DM. Manasvi v. CIT (1972) 86 ITR 557 (SC) observed as under: "Having heard learned counsel for the parties and having given our anxious consideration to the material available on the record, in the light of the law laid down by their Lordships of the Supreme Court, we are of the opinion that no fault can be found with the judgment of the Tribunal and, therefore, the question suggested by the Revenue does not arise as a question of law from the order of the Tribunal. The law is clear and explicit. Merely because this Court while hearing this application may be inclined to form an opinion that the material available on record could have enabled the initiation of penalty proceedings that cannot be a substitute for the requisite finding which should have been recorded by the assessing authority in the order of assessment but has not been so recorded.

A bare reading of the provisions of Section 271 and the law laid down by the Supreme Court makes it clear that it is the assessing authority which has to form its own opinion and record its satisfaction before initiating the penalty proceedings. Merely because the penalty proceedings have been initiated, it cannot be assumed that such a satisfaction was arrived at in the absence of the same being spelt out by the order of the assessing authority.

Even at the risk of repetition, we would like to state that the assessment order does not record the satisfaction as warranted by Section 271 for initiating the penalty proceedings." 22. I have already reproduced the assessment order at para. 3 above. It is evident from the above order that no satisfaction has been recorded by the AO in the course of assessment proceedings that the assessee concealed particulars of his income or furnished inaccurate particulars of such income. Without above satisfaction, valid jurisdiction to initiate penalty proceedings cannot be assumed under Section 271(1)(c) of the IT Act. The issuance of a notice under Section 271(1)(c) is not equated to recording of requisite satisfaction. Likewise, the fact that the loss was surrendered does not make any difference to the legal position. Thus, the impugned order of penalty suffers from incurable legal defect and, therefore, penalty proceedings are held to have not been initiated in accordance with law. The penalty levied is liable to be quashed on this short ground.

23. The second legal defect is based on the decision of Hon'ble Supreme Court in the case of CIT v. Prithi Pal Singh & Co. (supra) whereby their Lordships confirmed the decision of Hon'ble Punjab & Haryana High Court in the case of CIT v. Prithipal Singh & Co. (supra). Their Lordships of Punjab & Haryana High Court upheld the cancellation of penalty in a case where there" was no assessed income, nor any tax was found to be payable on assessment with the following remarks ; "Penalty imposed is paid in addition to the tax payable. When there is no tax payable, the question of any penalty does not arise. In fact, evasion of tax is the since qua non for imposition of penalty.

Clause (iii) deals with cases referred to in Clause (c) under Sub-section (1) of Section 271 of the Act and it clearly provides therein that the penalty or further sum payable by a person would be in addition to "any tax payable by him. Explns. 3 and 4 annexed to the said provision of law also presuppose taxable income with regard to the assessment year in question. If there is no taxable income or tax assessed for payment during a particular year, the question of evasion and consequently penalty do not arise. As is obvious from annexure "B", the assessee was assessed finally at a loss figure amounting to Rs. 34,164 as pointed out at p. 3.33 of the record.

Thus, there was no income and so the motive to avoid tax during the year in question is completely missing. May be, it may give a benefit to the assessee in the coming year as the loss could be carried forward but, by no stretch of imagination, can it be said that during the assessment year in question, the assessee had concealed its income." 24. On further appeal, their Lordships of the Supreme Court affirmed the order of the Punjab & Haryana High Court as under : We have heard learned counsel and find that, on the facts of this case, no interference is called for.

It is no doubt true that the above case pertains to asst. yr. 1970-71 and Expln. 3 to Section 271(1)(c) was added later but as is evident from extract of the judgment, the decision of their Lordships of the Punjab & Haryana High Court was given after considering Expln. 3. In fact, the decision was based on consideration of language used in main Section 271(1)(c) r/w Clause (iii) which provided that penalty imposed was to be paid in addition to the tax payable. Their Lordships observed that "if there is no taxable income or tax assessed for payment during a particular year, the question of evasion and consequently penalty do not arise". Therefore, their Lordships emphasized that penalty has to be in addition to tax payable and if no tax is payable, the question of imposing and recovering additional amount in shape of penalty would not arise. Therefore, in case of loss where no tax is found to be payable, the penalty cannot be imposed. Explns. 3 and 4 in the view of their Lordships "pre-supposed taxable income with regard to the assessment year in question".

25. The Hon'ble Supreme Court in the case of V.M. Salgaocar & Bros. (P) Ltd. v. CIT (2000) 243 ITR 383 (SC) observed as under : "Different considerations apply when a special leave petition under Art. 136 of the Constitution is simply dismissed by saying 'dismissing' and an appeal provided under Art. 133 is dismissed also with the words 'the appeal is dismissed. In the former case it has been laid down by this Court that when a special leave petition is dismissed this Court does not comment on the correctness or otherwise of the order from which leave to appeal is sought. But what the Court means is that it does not consider it to be a fit case for exercise of its jurisdiction under Art. 136 of the Constitution. That certainly could not be so when an appeal is dismissed though by a non-speaking order. Here the doctrine of merger applies. In that case, the Supreme Court upholds the decision of the High Court or of the Tribunal from which the appeal is provided under Clause (3) of Art. 133. This doctrine of merger does not apply in the case of dismissal of special leave petition under Art. 136. When an appeal is dismissed, the order of the High Court is merged with that of the Supreme Court." Thus, order of Hon'ble Punjab & Haryana High Court merged with the order of Hon'ble Supreme Court and became law of land under Art. 141 of the Constitution. As per the law laid down, penalty under Section 271(1)(c) can be recovered in addition to tax found payable on assessment. In case no tax is found to be payable, no penalty can be imposed. There is no dispute that in case in hand no tax was payable and, therefore, question of levy of penalty would not arise.

The above position was also recognised by the legislature and Clause (iii) to Section 271(1)(c) was amended by Finance Act, 2002, w.e.f. 1st April, 2003. The corresponding provision of the Finance Bill i.e., Section 101 provided as under: "in Clause (c)(iii), for the words "in addition to any tax payable", the words "in addition tp tax, if any, payable" shall be substituted w.e.f. the first day of April, 2003." The notes accompanying the Finance Act, 2002, provided as under in respect of above referred to amendment : "The existing provisions contained in Clause (iii) of the aforesaid Sub-section (1) provides for a penalty, in addition to any tax payable, of a sum which shall not be less than, but which shall not exceed three times the amount of tax sought to be evaded, for concealing particulars of income, or furnishing inaccurate particulars in respect thereof.

Sub-section (c) of this clause proposes to amend the said Clause (iii) so as to clarify that the penalty referred to therein can be levied even if no tax is payable on the total income assessed." 26. It is evident from above that the statutory provision has been amended to supersede the decision of the Hon'ble Supreme Court. The words "addition to any tax is payable" have been omitted by substituting with such expression in Sub-clause (c) to Sub-section (1) of Section 271 to make clear that penalty can be levied even if no tax is payable on total income assessed. If the view or argument that decision in the case of Prithipal Singh & Co. (supra) is applicable only to asst. yr. 1970-71 or earlier year, then there was no need to introduce the above amendment. There is no justification to treat the above amendment as redundant. The legislature has amended the section w.e.f. 1st April, 2003, specifically. In cases where penalty is to be imposed as per law prior to 1st April, 2003, Section 271(1)(c) r/w Clause (iii) of the same sub-section shall have no application where no tax was found to be payable on assessment of total income. There is no dispute that in the present case, the income was taken at nil and that no tax was payable. In the light of decision of Prithipal Singh & Co.

(supra), no penalty in my humble view could be imposed under Section 271(1)(c) of the IT Act. I hold accordingly.

27. Without prejudice to the above findings, I proceed to consider the levy of penalty on merit. As noted earlier, the levy of penalty was confirmed on appeal. On further appeal before the Tribunal, the learned JM in his 23 pages proposed order considered all material facts and judicial pronouncements cited before him and after making particular reliance on the decision of Hon'ble Supreme Court in the case of K.P.Madhusudan v. CIT (supra) confirmed the action of the learned CIT(A) and proposed to dismiss the appeal of the assessee.

28. The learned AM dissented from the above order and held that penalty imposed should be deleted. The learned Departmental Representative has also emphasized the two factors (i) loss of Rs. 36,80,600 was claimed and verified in the return and (ii) why the assessee had not relied upon his audited books of account and audit report. The onus lies on the assessee to prove that act of surrender did not tantamount to concealment of income or furnishing of inaccurate particulars of income. The learned Departmental Representative further argued that decision in the case of CIT v. Suresh Chand Mittal (supra) was not applicable to the facts of the case as no revised return was filed by the assessee. The other decision of the Supreme Court was applicable.

The learned Departmental Representative also placed copy of verification of return by the assessee and copy of order-sheet entries made during the course of assessment proceedings.

29. On examination of facts and circumstances of the case, I find that the AO has justified the levy of penalty by observing that loss was surrendered only when deep investigation was started and the assessee had no explanation to offer for the loss. It is observed that the assessee had fraudulently claimed the loss which he ultimately surrendered. The assessee could not even explain the manufacturing defect as claimed, It is further observed in the order that the assessee had not filed the true particulars of his income. The AO accordingly, held that "the assessee furnished inaccurate particulars of income and concealed his income to the extent of Rs. 36,80,600 as surrendered". In earlier portion of the order, the AO has observed "since the assessee had furnished inaccurate particulars of his income, penalty proceedings under Section 271(1)(c) initiated." 30. With reference to the above observations, the learned JM has agreed with the AO, whereas the learned AM has observed that findings recorded in the penalty order are not based on any material. He also pointed out technical and legal error in the order that the AO initiated penalty proceedings for furnishing inaccurate particulars of income but levied penalty for concealment of income. Thus, the AO failed to keep in mind the distinction which exists between furnishing of inaccurate particulars of income and concealment of income. Admittedly, photocopy of the order-sheet was not filed before the regular Bench which heard the matter. In my considered opinion, the Third Member is required to decide the matter under Section 255(4) of the IT Act with reference to material which was considered by the two Members taking opposite views and it is not permissible to take additional evidence into, consideration while deciding the issue as a Third Member. In the above situation and when nothing is stated in the assessment order, I am inclined to agree with the learned AM that findings of the AO to the extent that the assessee fraudulently claimed the loss and surrendered the same when deep investigation were started, are not justified. All the same, the learned JM in his order has recorded a finding that the assessee failed to substantiate the claim of loss made in the return and, therefore, levy of penalty was justified. He has also approved the levy as no revised returns were filed by the assessee. These findings are sought to be supported by the learned Revenue authorities. In the following paras, I consider this aspect of the matter. This is without prejudice to the earlier finding on additional evidence.

31. The learned CIT(A) in his order confirmed the levy of penalty purportedly referring to what happened before the AO during the course of assessment proceedings although the AO did not record such a finding in the assessment order as required under the law.

32. The learned JM has repeatedly held in his proposed order that the loss claimed in the return could not be substantiated. The explanation given in this regard was only general. Stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disprove the finding of learned CIT(A). The learned JM further observed that the assessee failed to prove that the loss suffered by him is true, fair and genuine. The learned JM further held that it is a case that comes under Expln. 1 to Section 271(1)(c) which provides that in a case where the explanation is offered which is found by the AO to be false or no explanation is offered or an explanation is offered which is not substantiated, the amount added in computing the total income of such person shall be deemed to represent the income in respect of which particulars have been concealed. The assessee also did not file any revised return and accordingly, levy of penalty in terms of decision of apex Court reported in (2001) 251 ITR 99 (SC) (supra) was justified.

In order to appreciate whether Expln. 1 referred to above is applicable or not, it is pertinent to see what happended before the AO as reflected in the order-sheet entries, photocopies of which have now been placed before me. The relevant entries are discussed hereinbelow : (i) The return in the present case was filed by the assessee on 2nd Oct., 1997, declaring a loss of Rs. 36,80,600. The order-sheet does not record receipt of above return. However, first entry in the order-sheet relating to notice issued under Section 143(2) on 21st Sept., 1998. 9 (ii) There is no entry relating to what happened in the next 10 months.

(iii) The next entry is dt. 19th July, 1999, recording that notice under Section 143(2) has been issued to the assessee for 6th Aug., 1999.

(iv) On 6th Aug., 1999, it is recorded that Shri V.K. Gupta, chartered accountant, attended and he was asked to file : (v) What happended on the date fixed i.e., 23rd Aug., 1999, is not recorded in the order-sheet.

(vi) The next entry dt. 8th Sept., 1999, states that the case was adjourned to 20th Sept., 1999.

(vii) What happened on 20th Sept., 1999, the date fixed, is again not recorded, (viii) The next entry is dt. 11th Oct., 1999, and is to the following effect : "11th Oct., 1999--Shri V.K. Gupta attended. Reply filed. The reasons stated for loss are general and not substantiated. To explain-- (2) Details of salary--Names and addresses of new employees--Mode of payment and proof.

(5) Explain clearly as to why loss incurred and substantiate it with proof and in figures.

(ix) It is again not recorded as to what happended on 27th Oct., 1999, the date fixed for hearing.

(x) The next entries dt. 2nd Nov., 1999, and 15th Nov., 1999, are to the following effect : "2nd Nov., 1999--Shri V.K. Gupta, CA attended. Adjourned for 11th Dec., 1999 to bring books of account for checking." (xi) There is no record as to what happended on llth Dec., 1999. In fact, no proceedings are recorded for 21 days till 21st Dec., 1999.

(xii) The entry dt. 21st Dec., 1999, records presence of Shri V.K. Gupta along with the presence of accountant of the assessee. It is recorded that books of account were produced by the assessee. The AO asked the assessee to furnish the further following details/explanation : (2) To substantiate as to which stock got damaged and proof of the same.

(4) In printed cloth purchase account it is noted that there are many cash purchases. What is the reason and where are those bills.July, 31 52,676 (5) Details proceedings regarding claims to be made from the shipping company.

(6) Reasons for increase in salary from 2 lacs to 5.12 lacs while the sales and production over last year are not in similar proportion.

(8) Points 6 & 7 of your reasons for losses of letter dt. 20th Sept., 1999, it is not clear as to what was the reason for loss and what was done of the rejected printed cloth. To bring books of account.

To bring Shri Subhash Gupta, proprietor on next hearing. The case is adjourned to 28th Dec., 1999." It is clear from the above that the AO had made detailed scrutiny of books of account and had found that some stock was got damaged. She wanted to know what happened to the rejected stock in printed cloth purchase account. She found that certain payments were made in cash.

Some proceedings were found to have been taken by the assessee against shipping companies. She wanted to know the details of those proceedings.

Reasons for increase in salary as compared to last year were also asked to be explained. The assessee was also asked to furnish details of increase in freight expenditure.

Point Nos. 6 and 7 of letter dt. 20th Sept., 1999, explaining reasons for losses were not clear to the AO. She further wanted to know as to what had happened to the rejected printed cloth. The case was adjourned for 7 days and next date of hearing was fixed on 28th Dec., 1999. The learned representative of the assessee was directed to bring Shri Subhash Gupta on the next date of hearing.

(xiii) It is not clear from the record as to what happened on 28th Dec., 1999, the date fixed.

(xiv) Again there is entry dt. 30th Dec., 1999, making attendance/presence of the assessee and his representative, Shri V.K. Gupta only. Nothing about what happened in the assessment proceedings, is recorded. The case is adjourned to 12th Jan., 2000.

This date appears to be superimposed.

(xv) No record of any proceedings having been taken place on 12th Jan., 2000, is recorded in the order-sheet.

(xvi) The next entry is dt.. 12th Jan., 2000, wherein Shri V.K. Gupta, C.A.'s attendance is recorded, It is further recorded that'- (1) The papers regarding case in (freight) Consumer Court show entry upto 31st Jan., 1997. No details or correspondence with the erring party given.

(3) Why salary is almost three times when production is less Also summons issued to members remained unserved with remarks--unverifiable unknown. Hence, this expenditure is not fully verifiable.

(4) The damaged stock was sold in the local market or exported.

Normally foreign buyers reject sick stock. Adjourned for 25th Jan., 2000." (xvii) No entry of the adjourned date i.e., 25th Jan., 2000, is recorded in the order-sheet, nor it is clear as to what happened on the above date, (xviii) The next entry is of dt. 27th Jan., 2000. The presence/attendance of the assessee and Shri V.K. Gupta is noted but what happened on that date is not mentioned except that the case is adjourned to 31st Jan., 2000.

(xix) The next entry in the order-sheet is of dt. 31st Jan., 2000, where it is recorded "none-attended".

(xx) The next entry is dt. 14th Feb., 2000, recording that Shri Subhash Gupta, proprietor, attended and offered to surrender the loss claimed, Hence, the assessment is being completed on nil income to which the assessee had agreed.

(xxi) The next entry is of dt. 15th Feb., 2000, recording case discussed and order passed under Section 143(3).

34. It is obvious from the above that the last entry recorded "case discussed" is erroneous and not based on facts. It is contradictory to the entry dt. 14th Feb., 2000, where it is specifically recorded that the assessee surrendered the loss claimed and hence, assessment is being completed on nil income. In the light of entries dt. 14th Feb., 2000, assessment being completed on nil income, there was nothing to be discussed on 15th Feb., 2000. The assessee or his representative was not present for discussion and there was no question of case discussed.

I have referred to several other omissions in the order-sheet entries in the earlier portion of this order. Most pertinent omission to record is as to what happened on 20th Sept., 1999, when the assessee explained the reasons for losses by filing written submission dt. 20th Sept., 1999. It is not noted in the order-sheet. Again, the assessee Shri Subhash Gupta was summoned for 28th Dec., 1999, and books of account were also directed to be produced on the above date. It is not mentioned that Shri Gupta did not comply with the above direction or not produced books of account. On the contrary, it is noted even in the assessment order that books of account were produced and test-checked.

Shri Gupta was again present on 30th Dec., 1999. His presence is duly recorded but what happended in the assessment proceedings is not recorded. The assessee did file information relating to claim of freight but the AO has mentioned that correspondence with the erring party should have been filed regarding freight claim. The AO examined and verified the instance of sale on cheap rates as is evident from the order-sheet entries. She raised an objection to the higher claim of salary to staff when production was less but stated nothing about the loss claimed. The AO now on the adjourned date wanted to know whether damaged stock was sold in the local market or exported. She raised a new query whether such stock was sold in local market or exported and surmises that normally foreign buyers reject such stock When entry dt. 21st Dec., 1999, and earlier entry are read with entry dt. 20th Jan., 2000, it cannot be inferred that claim of loss was not substantiated. The only query left to be explained was whether the damaged stock was sold in the local market or exported. At best, an inference can be drawn that the above query was not answered to. Would it follow that claim of loss was not substantiated 35. It is further pertinent to note that the assessee was directed to remain present in assessment proceedings along with books of account Tight from 28th Dec., 1999, till 27th Jan., 2000. Several dates were fixed in the above-mentioned period, some of dates were not even noted in the order-sheet and other dates though noted, the detail of proceedings is not recorded. Why assessee's presence/attendance was necessary in those proceedings is not clear. Why he was summoned by the AO to come to his office on 14th Feb., 2000, when he surrendered the loss If he had failed to attend on 31st Jan., 2000, the AO was required to pass exparte order on the basis of material on record. Why this was not done What difficulty the AO had faced The above background and the affidavit of the assessee is to be taken into account for determining whether Expln. 1 to Section 271(1)(c) is applicable or not.

36. Before coming to the conclusion whether Expln. 1 to Section 271(1)(c) is applicable, the following further circumstances are to be borne in mind : (i) That the assessee is an exporter and his income from export in the relevant period was totally exempt under Section 80HHC of the IT Act. The loss claimed in the return even if allowed to be brought forward, could not be of much help to the assessee in the year under consideration. The brought forward loss could be adjusted in subsequent assessment years against taxable income, if any. There was no immediate gain in loss assessed. This claim of the assessee has not been refuted either through material or any argument of Revenue authorities or in the proposed order of the learned JM. (ii) That return of the assessee was accompanied by audited accounts. The auditor did not point out any defect in the accounts and there is no finding that all transactions of sales and purchases and of expenses were not vouched or recorded.

(iii) The assessee did claim loss in foreign trade. How the loss is suffered by a businessman, obviously when cost of goods sold and expenditure exceed the sale realizations, So there are broadly three components of loss, sale, purchases and expenditure. All the three components here in this case were supported by the entries in the regular books of account which were audited and further supported by the vouchers and other relevant material. The loss can be said to be wrong and fraudulent if sales, purchases or expenditure are found to be wrongly recorded and not correctly shown. Has the AO found any sale, purchase or expenditure false or fictitious Is it the case of the Revenue that any sale, purchase or expenditure were not found to be recorded in the books of account admittedly produced before the AO whenever desired. These were checked and verified by the AO. The assessee further gave the background as to why the loss was suffered and those reasons were given in correspondence furnished to the AO. Those reasons were no doubt of general nature as details and specific instance of purchases, sales and expenditure which led to "loss" were duly recorded in the books of account. The AO obtained month-wise details of sales and purchases and it is no body's case that such details of sales and purchases were not filed. No defect is found in the above sales and purchases and it is not the case of the Revenue that the above details furnished were not sufficient to carry on investigation and verification or did not contain names and particulars of the buyers or did not show whether it was export sale or local sale. In the above situation how it could be said that the loss, was not substantiated. It is stated that the stock register was not produced to, show that the goods were damaged and defective.

No such finding is recorded in the assessment order. If such a finding is recorded in some secret note, then it is of no help.

Further, I do not know how stock register will contain entry of damaged and defective goods which were claimed and noted by the AO to have been sold at cheaper rates and, therefore, loss was suffered. Is there any material on record that this claim was false and fictitious On the other hand, entries in the order-sheet do suggest that the assessee did whatever was possible by producing details from the entries in the books of account and other material as required by the AO. It is evident that fresh and new query was raised by the AO every time when the case was taken up for hearing, Even the proprietor of the assessee was summoned to be present in proceedings. Why he was asked to be personally present on several hearings when his CA and his accountant were giving all details and producing books of account, is not made clear on record. If the assessee entertained the belief that the AO under no circumstances is going to accept the loss claimed and that he would have to attend and be present in IT Department from day-to-day and, therefore, though it better to put end to the litigation, buy peace by surrendering the loss, such belief is possible. Here, it may be noted that in the month of January, 2000, after 21st Dec., 1999, the assessee attended/was required to attend the proceedings before the AO on the following dates : It is not very pleasant to go and sit outside the IT Department on day-to-day basis.

The above circumstances have to be taken into account while deciding the issue along with the circumstances that the assessee was not to gain much if loss claimed was allowed to be carried forward as the assessee's income from business was exempt under Section 80HHC of the IT Act.

37. After having scanned the facts and circumstances of the case, I would like to refer to the provisions of penalty applicable in asst.

yr. 1997-98 with which we are concerned in the present appeal, The said relevant provisions are as under: "If the AO or the Dy. CIT(A) or the CIT(A) in the course of any proceedings under this Act is satisfied that any person : (c) has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty, (iii) In the case referred to in Clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of such income." 38. The Expln. 1 to Section 271(1)(c) applicable in the relevant period was to the following effect : "Explanation 1 : Where in respect of any facts material to the computation of the total income of any person under this Act, (A) such person fails to offer an explanation or offers an explanation which is found by the AO or the CIT(A) or the CIT to be false, or (B) such person offers an explanation which he is not- able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of Clause (c) of this sub-section be deemed to represent the income in respect of which particulars have been concealed." On analysis of above provisions particularly Expln. 1, it is clear that the Explanation would be applicable and the AO have to examine the following circumstances : (a) Whether the assessee has offered no explanation on facts material to his computation of income (c) Whether the explanation offered by the assessee is not substantiated by him? (d) Whether there is failure to prove that such explanation was bona fide and that all facts relating to the same and material to the computation of his total income were disclosed by the assessee.

Only on satisfaction of above conditions or some of them attracted to the facts of the case, the addition or disallowance can be treated as deemed concealment for purpose of Clause (c) above.

In the case of CIT v. K.P. Madhusudan (2000) 246 ITR 218 (Ker), the decision relied upon by the Revenue and affirmed by the Supreme Court, their Lordships of Kerala High Court observed about this Explanation as under: "Expln. 1, which primarily concerns the case at hand, automatically comes into operation when, in respect of any facts material to the computation of total income of any person, there is failure to offer an explanation or an explanation is offered which is found to be false by the AO or the first appellate authority, or an explanation is offered which is not substantiated. In such a case, the amount added or disallowed in computing the total income is deemed to represent the income in respect of which particulars have been concealed. As per the provisions of Expln. 1, the onus to establish that the explanation offered was bona fide and all facts relating to the same and material to the computation of his income have been disclosed by him will be on the person charged with concealment.

Mere failure to substantiate the explanation is not enough to warrant penalty. The Revenue has to establish that the explanation offered was not substantiated. The provisions of Expln. 1 are concerned only with cases coming under Clause (B) of the Explanation, where the assessee offered an explanation which he was not able to substantiate. The explanation of the assessee for the purpose of avoidance of penalty must be an acceptable explanation; it should not be a fantastic or fanciful one. As indicated above, the consequence follows as a matter of law. The burden is on the assessee. If he fails to discharge that burden, the presumption that he had concealed the income or furnished inaccurate particulars thereof is available to be drawn.

39. I have difficulty in accepting that the above decision is applicable to the present case. As noted earlier, the AO passed a very brief order and held nothing about concealment of income or furnishing of inaccurate particulars of income. Nothing is said about the explanation offered by the assessee and assessment is based on agreement with the assessee to take the income at nil. Therefore, there is no basis to apply the Explanation. In the penalty order, the AO did observe that the assessee could not substantiate the claim of loss and had no explanation to offer. It is further observed that the loss was fraudulently claimed and manufacturing defect could not be explained. I have also noted the observations of learned CIT(A) on further appeal and that of learned JM in appeal carried by the assessee to the Tribunal It has been held that the assessee could not substantiate the claim of loss and, therefore, is liable to be penalized in terms of Expln. 1 to Section 271(1)(c). The learned CIT(A) has tried to elaborate how explanation was not substantiated. The finding which was required to be recorded in the assessment order relating to satisfaction of the AO are attempted to be recorded by the learned CIT(A) in the impugned penalty order. This is not permissible and reference can be made to the decision of the Hon'ble Delhi High Court referred to earlier. The satisfaction and finding required to be recorded in assessment proceedings cannot be recorded for the first time by appellate authority in the penalty order.

40. Further, it is not possible to agree with the AO or CIT(A) that the assessee was not able to substantiate his explanation. The assessee had claimed loss and complete details of sales, purchases and expenditure were available in the audited books of account maintained by the assessee in the regular course of business. He also gave reasons and background in which loss had occurred. The details asked for, were also supplied from time to time. The details of freight expenses were also furnished. Evidence of proceedings taken against shipping company was also given. The assessee's proprietor also appeared when summoned by the AO from time to time. There is no finding by the AO that the claim relating to damaged and defective goods could not be verified from the evidence produced by the assessee. In fact, from the entries in the order-sheet, it is clear that she had found instances, of sale cheaper and damaged goods recorded in the accounts maintained by the assessee and produced before her. This is evident from the observations in the order-sheet entry dt. 12th Jan., 2000, wherein it is recorded "2. Books of to verify instances of sale on cheaper rates".............

(4) The damaged stock was sold in the local market or exported.

Normally foreign buyers reject such stock After 12th Jan., 2000, the case was fixed for 25th Jan., 2000 and 27th Jan., 2000 when personal presence of assessee and his CA noted. It is not written that information asked for by the assessee was not furnished. It is not possible to infer from the record that the books did not record sale of damaged goods or whether these were sold in local market or exported. There is no finding to the above effect, nor any defect was found in the sales recorded. In the assessment, it is specifically mentioned that books of account were produced and checked.

It is, therefore, not possible to hold that the assessee failed to substantiate explanation offered by him.

41. Even if for the sake of argument it is accepted that the assessee was not able to substantiate his explanation and Clause (B) of the Explanation is applicable here, the Revenue authorities are further required to record a finding that the assessee had failed to prove that his explanation was bona fide and that all facts material and material relating to compute his income were not disclosed by the assessee. I have already discussed in great details material facts and background of the case. On above facts, it is not possible for me to hold that explanation furnished by the assessee was not bona fide and material facts relating to computation of his total income were withheld by the assessee. It is clear on record that assessment is totally based on the offer of the assessee to get assessed at nil income with a view to put an end to litigation and to buy peace of mind. The finding as required by Clause (B) of above referred to Expln. 1, could not be recorded in the present case. The facts here are quite akin to the facts in the case of CIT v. Suresh Chand Mittal (supra) which has been affirmed by the Hon'ble Supreme Court in the case of CIT v. Suresh Chand Mittal (supra). It is a case where the assessee acted bona fide and in good faith and furnished all the information material for the assessment of the assessee. Nothing has been established to be concealed. No claim has been found to be wrong or false and, therefore, question of furnishing inaccurate particulars of income did not arise.

The ratio of the other case, i.e., of CIT v. K.P. Madhusudanan (supra) is not applicable to the facts of the case as in the said case the assessee was found to have invested Rs. 93,000 from undisclosed sources. The assessee did not disclose the sources of above investment in the course of assessment proceedings or during the course of penalty proceedings. The matter was taken as fully covered against the assessee under Expln. 1(B) to Section 271(1)(c) of the IT Act. No such finding can be recorded in this case.

It is further pertinent to note that the AO while computing income at nil allowed loss to the extent of Rs. 69,138 and disallowed the balance loss. No penalty under Section 271(1)(c) can be imposed in respect of above amount of Rs. 69,138, Now what is the material difference in facts relating to loss of Rs. 69,138 and the rest of the loss. How loss to the extent of Rs. 69,138 is treated as substantiated and not the rest. The Revenue has no answer.

In the light of above discussion, I agree with the view taken by the learned AM that the case of concealment of income or furnishing of inaccurate particulars of income is not established and, therefore, penalty levied is required to be cancelled.

42. The case shall now be placed before the Division Bench for the disposal of appeal in accordance with law.

1. The Hon'ble Vice President Shri Vimal Gandhi as Third Member in this case has concurred with the view taken by the AM that the case of concealment of income or furnishing inaccurate particulars of income is not established and, therefore, the penalty levied is required to be cancelled.

Court	Income Tax Appellate Tribunal ITAT Jaipur
Decided On	Jan-16-2003
Judge	V Gandhi, Vice, B Jain, D K Agarwal
Reported in	(2003)78TTJ(JP.)692
Appellant	Subhash Gupta (individual)
Respondent	Deputy Commissioner of Income Tax

Subhash Gupta (individual) Vs. Deputy Commissioner of Income Tax - Court Judgment