Narayanan and Co. Vs. Assistant Commissioner of - Court Judgment

Excerpt:
1. this is an appeal by the assessee against the levy of penalty under section 271(1)(a) of the income-tax act, 1961, we are concerned with the assessment year 1986-87. the assessee is a firm of abkari contractors. during the assessment year under consideration, the assessee has been carrying the abkari business in tripunithura range.the due date for filing the return of income was 31-7-1986. the assessee sought for extension of time for filing the return and was allowed up to 31-10-1986. since the assessee did not file the return of income, a notice under section 148 dated 18-11-1987 was served on the assessee on 20-11-1987 requiring the assessee to file the return within 30 days, the assessee did not respond. again by notices dated 30-5-1988, 4-11-1988, 3-2-1989 and 21-2-1989, the assessee was repeatedly asked to file the return for which there was also no compliance. the assessee filed its return of income only on 1-3-1989, i.e., after a delay of 31 months with a covering letter as follows:- sub:-filing of income-tax return - ref. py 8289 - assessment year 1986-87sir,we are filing herewith our return of income for the assessment year 1986-87.as we have misplaced and lost our account books and the same is found to benot traceable we are estimating our income on the basis of the total quantityof the arrack sold during the year. a statement showing the income estimatedis filed along with the return.we have filed form no. 12 on 30-7-1986 before the income-tax officer,d-ward, circle-i, ernakulam. a true copy of the application for continuationof registration in form no. 12 filed before the income-tax officer, d-ward,circle-i, ernakulam is filed herewith.a show-cause notice under section 271 read with section 274 was issued to the assessee requiring it to show cause as to why penalty should not be levied. the explanation on behalf of the assessee was that their relevant, books of accounts were either misplaced or lost and this has caused the delay in filing the return. the assessing officer concluded that the explanation offered by the assessee was false. according to him the assessee had filed the return estimating the income from arrack sales at rs. 2.50 per litre on the total quantity of arrack lifted from the excise authorities. the curry sales from the various shops was also estimated. at the time of assessment also, the assessee stated that they had not maintained any books of account for the business during the previous year and the income has been estimated by the assessing authorities and the estimate was substantially upheld by the cit (appeals). he further held that the assessee was a habitual defaulter in filing the return of income. the delay in filing the return for the earlier three years are as under:- thus he rejected the explanation offered by the assessee and levied penalty of rs. 1,21,231 under section 271(1)(a) of the income-tax act, 1961.2. in the appeal, the learned cit (appeals) upheld the levy of penalty but reduced the quantum by taking into consideration the payment of advance-tax. hence, the assessee is in second appeal.3. the assessee has taken additional grounds of appeal supported by materials on record whose veracity are not in dispute and therefore we admit the same and after hearing both sides proceed to deal with the same.4. on behalf of the assessee it was argued that the penalty will not lie as there is reasonable cause for the delay in filing the return, such as - that the assessee is a firm consisting of six partners, the managing partner is shri p.k. narayanan, having 30% share in profits and losses was one of the accused in a criminal case. he was arrested on 29-11 -1986 and was produced before the chief judicial magistrate on 30-11-1986 and he was in custody till 9-3-1989. he was granted bail with a specific direction that he shall not enter the limits of districts of ernakulam and kottayam except for the purpose of attending the court in connection with the case and he was directed to report before the dy. superintendent of police, trichur, every fortnight. the case was entrusted to the cbi by the hon'ble high court of kerala which was upheld by the supreme court as per its order dated 14-2-1986. when the matter was entrusted to the cbi, the cbi moved the high court to cancel the bail granted to the accused. the high court has ordered in criminal m.c. 533/1987 dated 10-8-1987 that the first respondent, shri p.k. narayanan, be arrested and committed to the custody. it. was further directed that the sessions judge dealing with the trial of his case was free to order his release on bail after completion of the examination of the principal witnesses for prosecution, on such conditions as he deems fit. the commitment was made on 24-4-1987 and the trial was commenced on 10-8-1987 and closed on 25-3-1988. he was in jail till 1991. the supreme court in crl. m.p. no. 949of 1991 in criminal appeal no. 315 of 1990 directed that shri p.k. narayanan be released on bail on his executing a bond in the sum of rs. 15,000 with two sureties in the like amount to the satisfaction of the additional sessions judge, ernakulam. shri narayanan became ill and was mentally very much up-set. his eldest son, who is also one of the partners of the assessee-firm was studying in college. other two sons are minors and remaining two are daughters. because of the charges against shri narayanan, there were lot of dislocation and lot of problems in the business and family. his wife and children were also up-set and found it difficult for their day-to-day affairs. in the meantime, a search was conducted by the cbi and some of the books were seized. these facts were brought to the notice of the assessing officer. in the list of witnesses for the prosecution dhayavathi k.t., his wife, was pw 25, krishnalal, his son, was pw 40, krishnakumar t.p., income-tax officer, was pw 47. hence, the learned counsel for the assessee argued that for the above reasons it has to be held that there is reasonable cause for the delay in filing the return of income and levy of penalty has to be cancelled.5. shri abraham, the learned departmental representative, on the other hand, submitted that this is a firm of six partners and their liability is joint and several. the question to be decided is whether there is any reasonable cause for the delay of 31 months. the firm has built up a defence on the criminal conduct of a partner. the assessee was granted time up to 31-10-1986 only on the ground that the statements were not ready. he relied on section 140(cc) which reads as under:- 140. the return under section 139 shall be signed and verified-(a) to (c) ** ** ** (cc) in the case of a firm by the managing partner thereof, or where for any unavoidable reason such managing partner is not able to sign and verify the return, or where there is no managing partner as such, by any partner thereof, not being a minor.in this case apart from shri p.k. narayanan, there are other partners who can verify and sign the return of income and furnish the same to the income-tax officer. this, they have not cared to do so. finally, the return was signed by shri krishnalal, the son of shri p.k.narayanan and one of the partners of the assessee-firm. further the income of the assessee was estimated. hence, the ground that the return was not filed since some of the accounts were lost or misplaced will not lie. notice under section 148 was issued to the firm on 18-11-1987 which was served upon the assessee on 20-11-1987. the assessee did not care to file the return of income. again notice under section 142(1) was also issued on 31-3-1988 and 30-5-1988 posting the case on 10-6-1988. for evidence, further notice under section 142(1) was again issued on 4-11-1988 posting the case to 14-11-1988. all these opportunities were not availed of by the assessee. hence the explanation offered by the assessee will not be a sufficient cause for delay and the penalty has to be sustained.6. thus, we have heard rival submissions. the only point that arises for our consideration is whether there was any reasonable cause for the delay of 31 months in filing the return of income for the assessment year 1986-87. admittedly, the assessee is a partnership firm consisting of six partners. their names and respective shares in profits/losses are as follows:- it is mentioned in the partnership deed that the first partner, namely shri p.k. narayanan, shall be the managing partner of the firm for the time being and all the day-to-day affairs of the firm shall be carried on by him. for the sake of convenience licence or permits may be taken either in the name of the firm or in the name of any one of the partners. hence, as per clause 7 of the partnership deed dated 1-4-1984, shri p.k. narayanan is the managing partner of the firm and all the day-to-day affairs of the firm are done by him. in this case, it is an admitted fact that shri narayanan is the first accused and was convicted in the murder case of shri peethambaran, who was one of the employees of the assessee-firm. originally it was concluded that it is a case of suicide but on further enquiry it was found that it was a murder and shri narayanan was arrested on 29-11-1986. he was granted bail. but as per the order of the high court, which was confirmed by the supreme court, the enquiry was taken over by the cbi and cbi moved the high court for the cancellation of the bail already granted in criminal m.c. 533/1987 on the ground that the first accused was influential and he will try to tamper with the evidence of the important witnesses. after hearing both the sides, the hon'ble high court ordered to arrest shri p.k. narayanan and committed to custody as per its order dated 10-8-1987. after he was tried and convicted, he moved the supreme court and the supreme court directed that shri p.k.narayanan be released on bail on his executing a bond in the sum of rs. 15,000 with two sureties in the like amount to the satisfaction of the additional sessions judge, ernakulam, on 15-3-1991. in view of these proceedings it could not be held that shri narayanan who was the managing partner was in a position to look into day-to-day affairs of the firm and to prepare the return of income and furnish the same in time. an accused in a murder case will be more worried about the outcome of trial than anything else. the argument that in the absence of shri narayanan, any of the partners could have filed the return of income as envisaged under section 140(cc) is also not available for the reason that his wife and son were cited as witnesses for the prosecution. further it is reasonable to hold that the investigations against shri narayanan leading to his arrest and trial for murder might have caused great agony, tension, stress and strain to the wife and son who were partners-cum-prosecution witnesses. it has not been shown that the other partners outside the family of shri narayanan were actively engaged in the conduct or management of the business of the firm, such as to ascertain to its income for purpose of filing the return of its income though under clause 12 of the partnership deed the firm can be represented by any of the partners.7. moreover the assessee had been consistently pleading before the assessing officer right from the stage of filing of the return that its books for the impugned assessment year were either lost or misplaced and were not traceable. the case of the department is that the explanation of the assessee was not true. we have carefully considered the submission. it is seen from the assessment orders for preceding three years that the assessee has been maintaining books of account though the assessments were concluded on estimate basis. therefore, there was no reason for the assessee not to have books of account for the impugned assessment year alone. the case of the assessee is that it had maintained books of account, such books were either lost or misplaced and not traceable. there have been raids in the premises of shri narayanan by the state police and the cbi and it is possible that the books were either misplaced or lost. the unsigned mahazar in the course of the raids which were perused by us and the learned departmental representative has reference to arrack shop documents and bill books though there were no definite details. therefore it is possible in such circumstances that the books get lost or misplaced or not traceable.8. the revenue's contention is that after all the assessee had estimated the income for this assessment year and therefore such estimate could have been made well within time. we have considered the submissions very carefully. hefty additions were made to the income of the assessee for the preceding years though the assessee relied on the book results on those years and the same was on appeals before the first appellate authority. it would appear that one of the appeals relating to the assessment year 1985-86 was heard by cit (appeals) on 9-1-1989 and the indication was that profit per litre will be estimated at rs. 2.50 per litre of arrack. thus, there is force in the contention of the assessee's counsel that upon geting the cue in the appeal for the preceding year, shri krishnalal, son of shri narayanan, proceeded to estimate the income on the same basis for this assessment year also in the absence of nonavailability of books of accounts. in such circumstances, it cannot be said that the assessee could have estimated its income well in advance.9. this apart in the case of polakulath wines in which shri narayanan was the managing partner where the return was filed only on 28-9-1988 (as against the due date of 31-7-1986) penalty proceedings under section 271(1)(a) were initiated and dropped. even in the case of the very assessee for the very assessment year on the plea that the books were lost or misplaced or not traceable on a petition under section 217 of the income-tax act, 1961 for waiver of interest, the dy.commissioner of income-tax had waived the interest to the extent of 50%. all these would go to strengthen our view additionally that the assessee had reasonable cause for late filing of the return. therefore, we cancel the penalty.

Judgment:
1. This is an appeal by the assessee against the levy of penalty under Section 271(1)(a) of the Income-tax Act, 1961, We are concerned with the assessment year 1986-87. The assessee is a firm of Abkari Contractors. During the assessment year under consideration, the assessee has been carrying the abkari business in Tripunithura range.

The due date for filing the return of income was 31-7-1986. The assessee sought for extension of time for filing the return and was allowed up to 31-10-1986. Since the assessee did not file the return of income, a notice under Section 148 dated 18-11-1987 was served on the assessee on 20-11-1987 requiring the assessee to file the return within 30 days, the assessee did not respond. Again by notices dated 30-5-1988, 4-11-1988, 3-2-1989 and 21-2-1989, the assessee was repeatedly asked to file the return for which there was also no compliance. The assessee filed its return of income only on 1-3-1989, i.e., after a delay of 31 months with a covering letter as follows:- Sub:-Filing of Income-tax return - Ref. PY 8289 - Assessment year 1986-87Sir,We are filing herewith our return of income for the assessment year 1986-87.As we have misplaced and lost our account books and the same is found to benot traceable we are estimating our income on the basis of the total quantityof the arrack sold during the year. A statement showing the income estimatedis filed along with the return.We have filed Form No. 12 on 30-7-1986 before the Income-tax Officer,D-Ward, Circle-I, Ernakulam. A true copy of the application for continuationof registration in Form No. 12 filed before the Income-tax Officer, D-Ward,Circle-I, Ernakulam is filed herewith.

A show-cause notice under Section 271 read with Section 274 was issued to the assessee requiring it to show cause as to why penalty should not be levied. The explanation on behalf of the assessee was that their relevant, books of accounts were either misplaced or lost and this has caused the delay in filing the return. The Assessing Officer concluded that the explanation offered by the assessee was false. According to him the assessee had filed the return estimating the income from arrack sales at Rs. 2.50 per litre on the total quantity of arrack lifted from the excise authorities. The curry sales from the various shops was also estimated. At the time of assessment also, the assessee stated that they had not maintained any books of account for the business during the previous year and the income has been estimated by the assessing authorities and the estimate was substantially upheld by the CIT (Appeals). He further held that the assessee was a habitual defaulter in filing the return of income. The delay in filing the return for the earlier three years are as under:- Thus he rejected the explanation offered by the assessee and levied penalty of Rs. 1,21,231 under Section 271(1)(a) of the Income-tax Act, 1961.

2. In the appeal, the learned CIT (Appeals) upheld the levy of penalty but reduced the quantum by taking into consideration the payment of advance-tax. Hence, the assessee is in second appeal.

3. The assessee has taken additional grounds of appeal supported by materials on record whose veracity are not in dispute and therefore we admit the same and after hearing both sides proceed to deal with the same.

4. On behalf of the assessee it was argued that the penalty will not lie as there is reasonable cause for the delay in filing the return, such as - that the assessee is a firm consisting of six partners, the managing partner is Shri P.K. Narayanan, having 30% share in profits and losses was one of the accused in a criminal case. He was arrested on 29-11 -1986 and was produced before the Chief Judicial Magistrate on 30-11-1986 and he was in custody till 9-3-1989. He was granted bail with a specific direction that he shall not enter the limits of Districts of Ernakulam and Kottayam except for the purpose of attending the court in connection with the case and he was directed to report before the Dy. Superintendent of Police, Trichur, every fortnight. The case was entrusted to the CBI by the Hon'ble High Court of Kerala which was upheld by the Supreme Court as per its order dated 14-2-1986. When the matter was entrusted to the CBI, the CBI moved the High Court to cancel the bail granted to the accused. The High Court has ordered in Criminal M.C. 533/1987 dated 10-8-1987 that the first respondent, Shri P.K. Narayanan, be arrested and committed to the custody. It. was further directed that the Sessions Judge dealing with the trial of his case was free to order his release on bail after completion of the examination of the principal witnesses for prosecution, on such conditions as he deems fit. The commitment was made on 24-4-1987 and the trial was commenced on 10-8-1987 and closed on 25-3-1988. He was in jail till 1991. The Supreme Court in CRL. M.P. No. 949of 1991 in Criminal Appeal No. 315 of 1990 directed that Shri P.K. Narayanan be released on bail on his executing a bond in the sum of Rs. 15,000 with two sureties in the like amount to the satisfaction of the Additional Sessions Judge, Ernakulam. Shri Narayanan became ill and was mentally very much up-set. His eldest son, who is also one of the partners of the assessee-firm was studying in College. Other two sons are minors and remaining two are daughters. Because of the charges against Shri Narayanan, there were lot of dislocation and lot of problems in the business and family. His wife and children were also up-set and found it difficult for their day-to-day affairs. In the meantime, a search was conducted by the CBI and some of the books were seized. These facts were brought to the notice of the Assessing Officer. In the list of witnesses for the prosecution Dhayavathi K.T., his wife, was PW 25, Krishnalal, his son, was PW 40, Krishnakumar T.P., Income-tax Officer, was PW 47. Hence, the learned Counsel for the assessee argued that for the above reasons it has to be held that there is reasonable cause for the delay in filing the return of income and levy of penalty has to be cancelled.

5. Shri Abraham, the learned departmental representative, on the other hand, submitted that this is a firm of six partners and their liability is joint and several. The question to be decided is whether there is any reasonable cause for the delay of 31 months. The firm has built up a defence on the criminal conduct of a partner. The assessee was granted time up to 31-10-1986 only on the ground that the statements were not ready. He relied on Section 140(cc) which reads as under:- 140. The return under Section 139 shall be signed and verified-(a) to (c) ** ** ** (cc) in the case of a firm by the managing partner thereof, or where for any unavoidable reason such managing partner is not able to sign and verify the return, or where there is no managing partner as such, by any partner thereof, not being a minor.

In this case apart from Shri P.K. Narayanan, there are other partners who can verify and sign the return of income and furnish the same to the Income-tax Officer. This, they have not cared to do so. Finally, the return was signed by Shri Krishnalal, the son of Shri P.K.Narayanan and one of the partners of the assessee-firm. Further the income of the assessee was estimated. Hence, the ground that the return was not filed since some of the accounts were lost or misplaced will not lie. Notice under Section 148 was issued to the firm on 18-11-1987 which was served upon the assessee on 20-11-1987. The assessee did not care to file the return of income. Again notice under Section 142(1) was also issued on 31-3-1988 and 30-5-1988 posting the case on 10-6-1988. For evidence, further notice under Section 142(1) was again issued on 4-11-1988 posting the case to 14-11-1988. All these opportunities were not availed of by the assessee. Hence the explanation offered by the assessee will not be a sufficient cause for delay and the penalty has to be sustained.

6. Thus, we have heard rival submissions. The only point that arises for our consideration is whether there was any reasonable cause for the delay of 31 months in filing the return of income for the assessment year 1986-87. Admittedly, the assessee is a partnership firm consisting of six partners. Their names and respective shares in profits/losses are as follows:- It is mentioned in the partnership deed that the first partner, namely Shri P.K. Narayanan, shall be the managing partner of the firm for the time being and all the day-to-day affairs of the firm shall be carried on by him. For the sake of convenience licence or permits may be taken either in the name of the firm or in the name of any one of the partners. Hence, as per Clause 7 of the partnership deed dated 1-4-1984, Shri P.K. Narayanan is the managing partner of the firm and all the day-to-day affairs of the firm are done by him. In this case, it is an admitted fact that Shri Narayanan is the first accused and was convicted in the murder case of Shri Peethambaran, who was one of the employees of the assessee-firm. Originally it was concluded that it is a case of suicide but on further enquiry it was found that it was a murder and Shri Narayanan was arrested on 29-11-1986. He was granted bail. But as per the order of the High Court, which was confirmed by the Supreme Court, the enquiry was taken over by the CBI and CBI moved the High Court for the cancellation of the bail already granted in Criminal M.C. 533/1987 on the ground that the first accused was influential and he will try to tamper with the evidence of the important witnesses. After hearing both the sides, the Hon'ble High Court ordered to arrest Shri P.K. Narayanan and committed to custody as per its order dated 10-8-1987. After he was tried and convicted, he moved the Supreme Court and the Supreme Court directed that Shri P.K.Narayanan be released on bail on his executing a bond in the sum of Rs. 15,000 with two sureties in the like amount to the satisfaction of the Additional Sessions Judge, Ernakulam, on 15-3-1991. In view of these proceedings it could not be held that Shri Narayanan who was the managing partner was in a position to look into day-to-day affairs of the firm and to prepare the return of income and furnish the same in time. An accused in a murder case will be more worried about the outcome of trial than anything else. The argument that in the absence of Shri Narayanan, any of the partners could have filed the return of income as envisaged under Section 140(cc) is also not available for the reason that his wife and son were cited as witnesses for the prosecution. Further it is reasonable to hold that the investigations against Shri Narayanan leading to his arrest and trial for murder might have caused great agony, tension, stress and strain to the wife and son who were partners-cum-prosecution witnesses. It has not been shown that the other partners outside the family of Shri Narayanan were actively engaged in the conduct or management of the business of the firm, such as to ascertain to its income for purpose of filing the return of its income though Under Clause 12 of the partnership deed the firm can be represented by any of the partners.

7. Moreover the assessee had been consistently pleading before the Assessing Officer right from the stage of filing of the return that its books for the impugned assessment year were either lost or misplaced and were not traceable. The case of the department is that the explanation of the assessee was not true. We have carefully considered the submission. It is seen from the assessment orders for preceding three years that the assessee has been maintaining books of account though the assessments were concluded on estimate basis. Therefore, there was no reason for the assessee not to have books of account for the impugned assessment year alone. The case of the assessee is that it had maintained books of account, such books were either lost or misplaced and not traceable. There have been raids in the premises of Shri Narayanan by the State Police and the CBI and it is possible that the books were either misplaced or lost. The unsigned Mahazar in the course of the raids which were perused by us and the learned departmental representative has reference to arrack shop documents and bill books though there were no definite details. Therefore it is possible in such circumstances that the books get lost or misplaced or not traceable.

8. The revenue's contention is that after all the assessee had estimated the income for this assessment year and therefore such estimate could have been made well within time. We have considered the submissions very carefully. Hefty additions were made to the income of the assessee for the preceding years though the assessee relied on the book results on those years and the same was on appeals before the first appellate authority. It would appear that one of the appeals relating to the assessment year 1985-86 was heard by CIT (Appeals) on 9-1-1989 and the indication was that profit per litre will be estimated at Rs. 2.50 per litre of arrack. Thus, there is force in the contention of the assessee's counsel that upon geting the cue in the appeal for the preceding year, Shri Krishnalal, son of Shri Narayanan, proceeded to estimate the income on the same basis for this assessment year also in the absence of nonavailability of books of accounts. In such circumstances, it cannot be said that the assessee could have estimated its income well in advance.

9. This apart in the case of Polakulath Wines in which Shri Narayanan was the managing partner where the return was filed only on 28-9-1988 (as against the due date of 31-7-1986) penalty proceedings under Section 271(1)(a) were initiated and dropped. Even in the case of the very assessee for the very assessment year on the plea that the books were lost or misplaced or not traceable on a petition under Section 217 of the Income-tax Act, 1961 for waiver of interest, the Dy.

Commissioner of Income-tax had waived the interest to the extent of 50%. All these would go to strengthen our view additionally that the assessee had reasonable cause for late filing of the return. Therefore, we cancel the penalty.