Sitaram S. Shetty Vs. Assistant Commissioner of Income - Court Judgment

Excerpt:
1. the common grievance projected in these two appeals by the assesses is that the learned cit(a) is not justified in confirming part of the penalties levied by the ao under section 271(1)(c) of the it act, 1961 2. the assessee, an individual, is a proprietor of hotel chandan and derives share of profit from m/s coffee house and m/s ghaiana restaurant. a search under section 132 of the act was carried out in the premises of the assessee on 30th sept., 1987. returns for the two years under appeal had not been filed by the assessee till the date of search. however, he filed returns on 30th aug., 1989, showing total income of rs. 87,200 for asst. yr. 1987-88 and rs. 90,670 for the asst.yr. 1988-89 on "estimated basis" without consulting the seized material which was in possession of the revenue. later on, the assessee got inspection of the seized material and revised the returns on 6th dec., 1990. on the basis of a diary which was seized during the search, the ao noted that the receipts/sales of hotel chandan were much higher than those estimated by the assessee. the ao assessed the total income for the asst. yr. 1987-88 at rs. 3,02,835 and for asst. yr. 1988-89 at rs. 4,07,630. the ao initiated penalty proceedings under section 273(1)(c), since according to him, the assessee had not furnished correct particulars of income from his proprietary business of hotel chandan.in response to the show-cause notice, the assessee submitted before the ao as follows : (a) due to non-availability of full information, the income from hotel chandan was estimated. after on, after taking inspection of the seized records in the custody of the department he furnished a revised return of income declaring an enhanced income. (b) in the revised return of income the assesses declared his sales at rs. 17 lakhs, the ao enhanced it to rs. 18 lakhs and the cit(a) settled at rs. 17.5 lakhs. this addition was made on the basis of estimate and no concealment was detected by the ao.the ao was not satisfied with the explanation furnished. in the penalty order for the asst. yr. 1987-88, the ao has observed as under : "the simple fact that a diary recording his daily turnover was scrupulously maintained by the assessee goes to prove that he had a proper record of his annual turnover which was as high as rs. 17 lakhs to 18 lakhs for the previous year. despite this, instead of maintaining the regular books of accounts and declaring actual income he chose to estimate his income at a paltry figure of rs. 45,000. thus, there was a definite intention to conceal the income. his contention that the income was estimated "as there was no full information available to arrive at the correct figure of income" is not acceptable, because he had maintained regular record of his turnover and thus the fact remains that he estimates his income at a very low figure and never cared to rectify the suppression of income until the adverse evidence in the nature of his recording in the diary was shown to him during the regular assessment proceedings." . .similar observation was made by him for the asst. yr. 1988-89. the ao was of the opinion that detection of concealment in the form of diary had already resulted in admitted enhancement of income from rs. 45,000 to rs. 1,80,171 for the asst. yr. 1987-88 and for asst. yr. 1988-89 from rs. 50,000 to rs. 2,32,498. he also observed that it was due to the detection by the ao of the suppression of sales that the assessee had admitted an annual turnover of rs. 17 lakhs in asst. yr. 1987-88 and of rs. 20,70,000 in asst. yr. 1988-89. the ao had also further made enhancement of turnover of rs. 1 lakh and of rs. 1,30,000 in asst. yrs.1987-88 and 1988-89, respectively. the cit(a) had upheld the enhancement to the tune of rs. 50,000 and rs. 80,000 in these years.holding that the assessee had concealed particulars of his income, the ao levied penalty of rs. 1,38,060 for the asst. yr. 1987-88 and of rs. 1,80,780 for the asst. yr. 1988-89. the penalties levied were at 15 per cent of the tax sought to be evaded.3. on appeal, the cit(a) gave partial relief. he reduced the penalties from 150 per cent to 100 per cent as also quantum of concealed income so determined by him. he agreed with the ao that detection of concealment in the form of diary seized during the search had resulted in declaration of enhanced income.4. shri n.c. khandelwal, the learned counsel for the assessee, submitted that there is no justification for the impugned penalties. he submitted that there was no detection by the ao. the books of account for the asst. yr. 1987-88 and 1988-89 were seized on 30th sept., 1987.returns for the same years had not been filed till the date of search.the returns for the said years were filed subsequently in 1989 by estimating income on the basis of earlier income because of non-availability of the books and records which were seized. if the inspection was to be taken, it would have taken further time and the assessee would have faced the consequences of delayed return. thus, the assessee had no choice but to estimate his income based on his earlier income. he submitted that the contention of the ao that the revised return with higher income was furnished only after confrontation with the diary showing the actual turnover is not true and correct. before the case being heard, the assessee wanted to rectify the mistake, if any, and asked for the inspection of the seized material and found the impounded diary which contained some notings made about sales for few months. on this basis and to be on the safer side, the assessee had estimated the sales himself for the whole year and estimated the income. this higher sales and higher income was estimated by the assessee voluntarily in order to buy peace of mind and to avoid delay in the completion of the assessment. the assessee also estimated the g.p. at 32 per cent because of the increase in raw materials cost prevailing in the market. the hearing of the case took place only after the revised return was filed. he submitted that the assessee had acted bona fide and, accordingly, no penalty is leviable. in support of his contention, he relied upon the following authorities; 5. shri a.p. srivastav, the senior departmental representative strongly supported the orders of the authorities below. his first contention was that the enhanced income shown in the returns was after the search.there is room for stating that the assessee would not have disclosed the income voluntarily because if these were the case of an honest assessee who wanted to come forward with his correct income, he would not have taken such a long time of two years itself in filing the returns. he submitted that the action of the assessee in filing revised returns was after detection and hence not bona fide. he submitted that during the course of search a diary was seized and it was a case of glaring concealment and but for the search by the department and enquiries made by the department, concealed income would have not seen light of the day.he submitted that action of the cit(a) is justified in view of g.c.agarwal v. cit (1990) 186 itr 571 (sc); biland ram hargan dass v. cit (1988) 171 itr 390 (all); calicut trading co. v. cit (1989) 178 itr 430 (ker); and cit v. k.p. madhusudanan (2000) 246 itr 218 (ker).6. we have considered the rival submissions and perused the facts on record. penalty proceedings are penal in nature. elementary principles of criminal law will apply. it is a quasi-criminal proceeding. there should be conscious concealment. penalty proceedings are distinct and different from assessment proceedings. findings in the assessment proceedings are not conclusive, but are relevant. the entire material should be considered afresh by the authorities below before imposing penalty. even after addition of explanation to section 271, conscious concealment is necessary. the explanation provides only a rule of evidence raising rebuttable presumption in certain cases. no substantive right is created or added thereof- substantive law relating to levy of penalty is preserved. in the present case the search took place on 30th sept., 1987 and the books of account for the asst. yrs.1987-88 and 1988-89, were seized on the same date. when the books of account were seized, returns for the said years had not been filed till the date of seizure. returns for the said years were filed subsequently on 30th aug., 1989, by "estimating" income on the basis of earlier income because of non-availability of books and records which were seized by the department. if the inspection was to be taken, it would have taken further time and the assessee would have faced the consequences of delayed returns. thus, the assessee had no choice but to estimate his income based on his earlier income. thereafter, the assessee got inspection of the seized books and filed revised returns with higher income. here also, returns were revised suo motu and not on the basis of any enquiry or concealment detected by the ao. before the case being heard, the assessee wanted to rectify the mistake, if any, and ask for the inspection of the seized material and found the impounded diary which contained some notings made about sales for few months. on this basis and to be on safer side, the assessee had estimated (again) the sales himself for the whole year and estimated the income. this higher sales and higher income was estimated by the assessee voluntarily and not on the basis of any defect pointed out by the ao in the seized material. the assessee also estimated a g.p, at the rate of 32 per cent because of the increase in raw materials cost prevailing in the market. the hearing of the case took place only after the revised returns were filed. the learned senior departmental representative's argument that the assessee came forward only after a gap of two years or the contention of the ao in his penalty order that the assessee came forward only when found that the department had completed enquiries and was in a position to make assessment, are both wrong. in fact, the assessments had been made on the basis of statements prepared by the assessee. in anand kumar saiaf & ors. v. cit (1995) 211 itr 562 (cal), the hon'ble calcutta high court has clearly held that merely seizure or papers cannot mean detection and that when detection has not taken place, if the assessee were to come forward with a disclosure under the amnesty scheme (in this case by way of revised returns) he is very well eligible for all the benefits as envisaged under the amnesty' scheme. the hon'ble calcutta high court further observed at p. 574 as under; "the mere stigma of search and seizure cannot shut out the assessee from the amnesty. the scheme is an inducement to evaders to make a clean breast of past evasions and square up accounts with the revenue. the persons who are left out from this opportunity are those whose concealments have come to light before hand by investigations and search and seizure operations carried out by the revenue. the clarification of the board in its answer to question no. 19 as to the meaning of the expression "before detection by the department" show that if the assessing authority has a prima facie belief that would not mean detection. the dictionary meaning of the word 'detect' is 'to discover the true especially hidden or disguised' character or 'to discover to determine the existence, presence or fact" (see webster's third new international dictionary, 1976 edn.) in the instant case, certain documents and papers were seized. they might or might not reveal concealment. even the seizure could not lend to a prima facie belief as to concealment as the contents, purport and the implications of the documents were yet to be gone into. therefore, at the point of time the return under the amnesty scheme was filed, the ao admittedly had no idea as to whether the seized papers would reveal any concealment. the mere fact that the petitioner appellant's case was awaiting a probe with reference to his past records as well as extrinsic sources could not lead to his ouster from the scope of the scheme." we find that though the assessee took two years to file the returns and another year to file revised returns, but during these three years, the revenue did not carry out any investigation in respect of the search material and, accordingly, the ratio laid down by the calcutta high court in the case of anand kumar saiaf (supra) applies here. in the case of yashwant b. chigteri v.asstt. cit (2001) 70 ttj (pune) 242 : (2000) 75 itd 377 (pune) decided by this bench, the ao's case was that but for the search the assessee would not have filed the return of income showing capital gain of rs. 2,86,470 on sale of shares.according to the ao there was nothing on record to show that the assessee would have disclosed the entire capital gain even if the search action would not have taken place. in rejecting the contention of the department that there could be no concealment with reference to the income returned, this bench did not base its decision either on the fact that return was filed without delay or that sources were known to the department; but we based our decision on the fact that under the it act, concealment is to be seen with reference to the income returned.this finding of ours was based on the decision of the hon'ble supreme court in the case of brij mohan v. cit (1979) 120 itr 1 (sc).7. in our opinion, the assessee had acted bona fide and the revised returns were filed voluntarily and there was no intention on the part of the assessee to conceal the income. the department had already seized all the records and it was in possession of the diary also. it is not as if the assessee was to disclose something which the department would not have known. by filing revised return what the assessee did was only to bring in his returns information which was already in possession of the department.8. the word 'detection' has not been defined in the act. it does not, therefore, have a rigid meaning. when a word is not defined in an act, it is permissible to refer to the dictionary meaning to find out the general sense in which that word is understood. in this connection, the context of the subject also becomes necessary. in black's dictionary, the word 'detection' has several meanings. one of them is 'investigation'. the other is to follow step by step by cogent enquiry or observation. in the present case, even though a diary was seized during the course of search, there was neither any investigation by the ao nor there was any action to follow step by step by cogent enquiry.the seized diary remained in the custody of the department for three years and the assessee inspected the diary and on the basis of entries made in the diary, he came up voluntarily with the revised returns.there was no concealment of any fact on the part of the assesses because the diary and books of account were in the possession of the department. under the circumstances, the charge of concealment cannot be attributed to the assessee.9. in the light of above discussion, we see no justification for the impugned penalties and delete the same.

Judgment:
1. The common grievance projected in these two appeals by the assesses is that the learned CIT(A) is not justified in confirming part of the penalties levied by the AO under Section 271(1)(c) of the IT Act, 1961 2. The assessee, an individual, is a proprietor of Hotel Chandan and derives share of profit from M/s Coffee House and M/s Ghaiana Restaurant. A search under Section 132 of the Act was carried out in the premises of the assessee on 30th Sept., 1987. Returns for the two years under appeal had not been filed by the assessee till the date of search. However, he filed returns on 30th Aug., 1989, showing total income of Rs. 87,200 for asst. yr. 1987-88 and Rs. 90,670 for the asst.

yr. 1988-89 on "estimated basis" without consulting the seized material which was in possession of the Revenue. Later on, the assessee got inspection of the seized material and revised the returns on 6th Dec., 1990. On the basis of a diary which was seized during the search, the AO noted that the receipts/sales of Hotel Chandan were much higher than those estimated by the assessee. The AO assessed the total income for the asst. yr. 1987-88 at Rs. 3,02,835 and for asst. yr. 1988-89 at Rs. 4,07,630. The AO initiated penalty proceedings under Section 273(1)(c), since according to him, the assessee had not furnished correct particulars of income from his proprietary business of Hotel Chandan.

In response to the show-cause notice, the assessee submitted before the AO as follows : (a) Due to non-availability of full information, the income from Hotel Chandan was estimated. After on, after taking inspection of the seized records in the custody of the Department he furnished a revised return of income declaring an enhanced income.

(b) In the revised return of income the assesses declared his sales at Rs. 17 lakhs, the AO enhanced it to Rs. 18 lakhs and the CIT(A) settled at Rs. 17.5 lakhs. This addition was made on the basis of estimate and no concealment was detected by the AO.The AO was not satisfied with the explanation furnished. In the penalty order for the asst. yr. 1987-88, the AO has observed as under : "The simple fact that a diary recording his daily turnover was scrupulously maintained by the assessee goes to prove that he had a proper record of his annual turnover which was as high as Rs. 17 lakhs to 18 lakhs for the previous year. Despite this, instead of maintaining the regular books of accounts and declaring actual income he chose to estimate his income at a paltry figure of Rs. 45,000. Thus, there was a definite intention to conceal the income.

His contention that the income was estimated "as there was no full information available to arrive at the correct figure of income" is not acceptable, because he had maintained regular record of his turnover and thus the fact remains that he estimates his income at a very low figure and never cared to rectify the suppression of income until the adverse evidence in the nature of his recording in the diary was shown to him during the regular assessment proceedings." .

.

Similar observation was made by him for the asst. yr. 1988-89. The AO was of the opinion that detection of concealment in the form of diary had already resulted in admitted enhancement of income from Rs. 45,000 to Rs. 1,80,171 for the asst. yr. 1987-88 and for asst. yr. 1988-89 from Rs. 50,000 to Rs. 2,32,498. He also observed that it was due to the detection by the AO of the suppression of sales that the assessee had admitted an annual turnover of Rs. 17 lakhs in asst. yr. 1987-88 and of Rs. 20,70,000 in asst. yr. 1988-89. The AO had also further made enhancement of turnover of Rs. 1 lakh and of Rs. 1,30,000 in asst. yrs.

1987-88 and 1988-89, respectively. The CIT(A) had upheld the enhancement to the tune of Rs. 50,000 and Rs. 80,000 in these years.

Holding that the assessee had concealed particulars of his income, the AO levied penalty of Rs. 1,38,060 for the asst. yr. 1987-88 and of Rs. 1,80,780 for the asst. yr. 1988-89. The penalties levied were at 15 per cent of the tax sought to be evaded.

3. On appeal, the CIT(A) gave partial relief. He reduced the penalties from 150 per cent to 100 per cent as also quantum of concealed income so determined by him. He agreed with the AO that detection of concealment in the form of diary seized during the search had resulted in declaration of enhanced income.

4. Shri N.C. Khandelwal, the learned counsel for the assessee, submitted that there is no justification for the impugned penalties. He submitted that there was no detection by the AO. The books of account for the asst. yr. 1987-88 and 1988-89 were seized on 30th Sept., 1987.

Returns for the same years had not been filed till the date of search.

The returns for the said years were filed subsequently in 1989 by estimating income on the basis of earlier income because of non-availability of the books and records which were seized. If the inspection was to be taken, it would have taken further time and the assessee would have faced the consequences of delayed return. Thus, the assessee had no choice but to estimate his income based on his earlier income. He submitted that the contention of the AO that the revised return with higher income was furnished only after confrontation with the diary showing the actual turnover is not true and correct. Before the case being heard, the assessee wanted to rectify the mistake, if any, and asked for the inspection of the seized material and found the impounded diary which contained some notings made about sales for few months. On this basis and to be on the safer side, the assessee had estimated the sales himself for the whole year and estimated the income. This higher sales and higher income was estimated by the assessee voluntarily in order to buy peace of mind and to avoid delay in the completion of the assessment. The assessee also estimated the G.P. at 32 per cent because of the increase in raw materials cost prevailing in the market. The hearing of the case took place only after the revised return was filed. He submitted that the assessee had acted bona fide and, accordingly, no penalty is leviable. In support of his contention, he relied upon the following authorities; 5. Shri A.P. Srivastav, the senior Departmental Representative strongly supported the orders of the authorities below. His first contention was that the enhanced income shown in the returns was after the search.

There is room for stating that the assessee would not have disclosed the income voluntarily because if these were the case of an honest assessee who wanted to come forward with his correct income, he would not have taken such a long time of two years itself in filing the returns. He submitted that the action of the assessee in filing revised returns was after detection and hence not bona fide. He submitted that during the course of search a diary was seized and it was a case of glaring concealment and but for the search by the Department and enquiries made by the Department, concealed income would have not seen light of the day.

He submitted that action of the CIT(A) is justified in view of G.C.Agarwal v. CIT (1990) 186 ITR 571 (SC); Biland Ram Hargan Dass v. CIT (1988) 171 ITR 390 (All); Calicut Trading Co. v. CIT (1989) 178 ITR 430 (Ker); and CIT v. K.P. Madhusudanan (2000) 246 ITR 218 (Ker).

6. We have considered the rival submissions and perused the facts on record. Penalty proceedings are penal in nature. Elementary principles of criminal law will apply. It is a quasi-criminal proceeding. There should be conscious concealment. Penalty proceedings are distinct and different from assessment proceedings. Findings in the assessment proceedings are not conclusive, but are relevant. The entire material should be considered afresh by the authorities below before imposing penalty. Even after addition of Explanation to Section 271, conscious concealment is necessary. The Explanation provides only a rule of evidence raising rebuttable presumption in certain cases. No substantive right is created or added thereof- Substantive law relating to levy of penalty is preserved. In the present case the search took place on 30th Sept., 1987 and the books of account for the asst. yrs.

1987-88 and 1988-89, were seized on the same date. When the books of account were seized, returns for the said years had not been filed till the date of seizure. Returns for the said years were filed subsequently on 30th Aug., 1989, by "estimating" income on the basis of earlier income because of non-availability of books and records which were seized by the Department. If the inspection was to be taken, it would have taken further time and the assessee would have faced the consequences of delayed returns. Thus, the assessee had no choice but to estimate his income based on his earlier income. Thereafter, the assessee got inspection of the seized books and filed revised returns with higher income. Here also, returns were revised suo motu and not on the basis of any enquiry or concealment detected by the AO. Before the case being heard, the assessee wanted to rectify the mistake, if any, and ask for the inspection of the seized material and found the impounded diary which contained some notings made about sales for few months. On this basis and to be on safer side, the assessee had estimated (again) the sales himself for the whole year and estimated the income. This higher sales and higher income was estimated by the assessee voluntarily and not on the basis of any defect pointed out by the AO in the seized material. The assessee also estimated a G.P, at the rate of 32 per cent because of the increase in raw materials cost prevailing in the market. The hearing of the case took place only after the revised returns were filed. The learned senior Departmental Representative's argument that the assessee came forward only after a gap of two years or the contention of the AO in his penalty order that the assessee came forward only when found that the Department had completed enquiries and was in a position to make assessment, are both wrong. In fact, the assessments had been made on the basis of statements prepared by the assessee. In Anand Kumar Saiaf & Ors. v. CIT (1995) 211 ITR 562 (Cal), the Hon'ble Calcutta High Court has clearly held that merely seizure or papers cannot mean detection and that when detection has not taken place, if the assessee were to come forward with a disclosure under the Amnesty Scheme (in this case by way of revised returns) he is very well eligible for all the benefits as envisaged under the Amnesty' Scheme. The Hon'ble Calcutta High Court further observed at p. 574 as under; "The mere stigma of search and seizure cannot shut out the assessee from the amnesty. The scheme is an inducement to evaders to make a clean breast of past evasions and square up accounts with the Revenue. The persons who are left out from this opportunity are those whose concealments have come to light before hand by investigations and search and seizure operations carried out by the Revenue. The clarification of the Board in its answer to question No. 19 as to the meaning of the expression "before detection by the Department" show that if the assessing authority has a prima facie belief that would not mean detection. The dictionary meaning of the word 'detect' is 'to discover the true especially hidden or disguised' character or 'to discover to determine the existence, presence or fact" (see Webster's Third New International Dictionary, 1976 Edn.) In the instant case, certain documents and papers were seized. They might or might not reveal concealment. Even the seizure could not lend to a prima facie belief as to concealment as the contents, purport and the implications of the documents were yet to be gone into. Therefore, at the point of time the return under the Amnesty Scheme was filed, the AO admittedly had no idea as to whether the seized papers would reveal any concealment. The mere fact that the petitioner appellant's case was awaiting a probe with reference to his past records as well as extrinsic sources could not lead to his ouster from the scope of the scheme." We find that though the assessee took two years to file the returns and another year to file revised returns, but during these three years, the Revenue did not carry out any investigation in respect of the search material and, accordingly, the ratio laid down by the Calcutta High Court in the case of Anand Kumar Saiaf (supra) applies here. In the case of Yashwant B. Chigteri v.Asstt. CIT (2001) 70 TTJ (Pune) 242 : (2000) 75 ITD 377 (Pune) decided by this Bench, the AO's case was that but for the search the assessee would not have filed the return of income showing capital gain of Rs. 2,86,470 on sale of shares.

According to the AO there was nothing on record to show that the assessee would have disclosed the entire capital gain even if the search action would not have taken place. In rejecting the contention of the Department that there could be no concealment with reference to the income returned, this Bench did not base its decision either on the fact that return was filed without delay or that sources Were known to the Department; but we based our decision on the fact that under the IT Act, concealment is to be seen with reference to the income returned.

This finding of ours was based on the decision of the Hon'ble Supreme Court in the case of Brij Mohan v. CIT (1979) 120 ITR 1 (SC).

7. In our opinion, the assessee had acted bona fide and the revised returns were filed voluntarily and there was no intention on the part of the assessee to conceal the income. The Department had already seized all the records and it was in possession of the diary also. It is not as if the assessee was to disclose something which the Department would not have known. By filing revised return what the assessee did was only to bring in his returns information which was already in possession of the Department.

8. The word 'detection' has not been defined in the Act. It does not, therefore, have a rigid meaning. When a word is not defined in an Act, it is permissible to refer to the dictionary meaning to find out the general sense in which that word is understood. In this connection, the context of the subject also becomes necessary. In Black's Dictionary, the word 'detection' has several meanings. One of them is 'investigation'. The other is to follow step by step by cogent enquiry or observation. In the present case, even though a diary was seized during the course of search, there was neither any investigation by the AO nor there was any action to follow step by step by cogent enquiry.

The seized diary remained in the custody of the Department for three years and the assessee inspected the diary and on the basis of entries made in the diary, he came up voluntarily with the revised returns.

There was no concealment of any fact on the part of the assesses because the diary and books of account were in the possession of the Department. Under the circumstances, the charge of concealment cannot be attributed to the assessee.

9. In the light of above discussion, we see no justification for the impugned penalties and delete the same.