Commissioner Of Income Tax - Applicant(S v. Chandra Vilas Hotel - Respondent(S

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No. 72 of 1995 For Approval and Signature: HONOURABLE MR.JUSTICE R.S.GARG HONOURABLE MR.JUSTICE M.R. SHAH =========================================================1[Whether Reporters of Local Papers may be allowed ]to see the judgment ?2To be referred to the Reporter or not ?1[Whether Reporters of Local Papers may be allowed ]to see the judgment ?2To be referred to the Reporter or not ? 3[Whether their Lordships wish to see the fair copy ]of the judgment ?Whether this case involves a substantial question of law as to the interpretation of the 4constitution of India, 1950 or any order made thereunder ?5[Whether it is to be circulated to the civil judge ]? ========================================================= COMMISSIONER OF INCOME TAX - Applicant(s) Versus CHANDRA VILAS HOTEL - Respondent(s) ========================================================= Appearance : MR BB NAIKfor Applicant(s) : 1,NOTICE SERVED for Respondent(s) : 1,========================================================= CORAM :HONOURABLE MR.JUSTICE R.S.GARG and HONOURABLE MR.JUSTICE M.R. SHAH Date : 18/08/2006 ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE R.S.GARG) Mr. B B. . Naik, learned counsel for the Revenue.None for the assessee though served, . 2.Present is a Reference under Section 256 1( ) ofthe Indian Income TaxAct by the Income Tax AppellateTribunal, AhmedabadBench'A', attheinstanceoftheRevenue on the following question for our opinion; 'Whether the Appellate Tribunal is rightinlawandonfactsincancellingthepenalty levied u s / . 271 1 c( )( ) of the Actwhen no correct and complete accountsweremaintainedandthebookresultshad been rejected from year to year andsubstantialadditionsmadewereacceptedbytheassesseeandthatinspite of this the assessee persisted inmaintaining the books of account in thesame way ?' 3.The short facts, leading to the present Reference,are that the assessee who is in the hotel business, for the-accounting year 1967 68 submitted its returned income the, , I T O. . . noted that the assessee had disclosed the total salesof Rs. 19 55 651,,/- as compared to Rs. 17 70 504,,/- for theearlier year but the gross profit was reduced to 24% incomparison to 31 6. % for the last year. He also found that ITR/72/19953/11JUDGMENT themannerinwhichtheaccountsweremaintainedtheincome could not be properly estimated and while doing sohe alsoobservedthat the Auditorsofthe assessee hadclearly observed that for the check income or for the testincome of the particular day the required slips were notproduced before theAuditors. The Assessing Officer heldthat the income was not properly returned, he accordinglyapplied Section 145 1( ) of the Indian Income Tax Act, andassessed the income by adding 20% more to the returnedincome. Thefactofadditionwasnotdisputedbytheassessee and it felt content with the said order.4.The Assessing Officer, thereafter, started penaltyproceedingsunderSection271 1( ) oftheActand, afterfinding that the penalty would be more than Rs 100., hereferredthemattertotheInspectingAssistantCommissioner ('IAC' for short). The IAC, after giving properopportunity of hearing to the parties, observed that presentwas a fit case for imposition. The matter was taken beforetheTribunalwhichheldinfavouroftheassesseeandobservedthatinviewofthebonafideconductoftheassessee no penalty could be imposed. At the instance ofthe Revenue, the matter was referred to this Court, whichwas registered as 'ITR No. 125 and 126 of 1978'. ThematterwasfinallyheardanddisposedofbyaDivisionBench of this Court by order dated 28[th]March 1986. Thesaid Judgment stands reported in 1987 Vol. 165 ITR Page ITR/72/19954/11JUDGMENT ITR/72/19954/11JUDGMENT 300. The Division Bench of the High Court found that theTribunal was unjustified in holding that the penalty couldnot be imposed. The High Court made various observationsin its order including the observation that the approach oftheTribunal, inexaminingthequestionwhetherlevyofpenalty was justified, was erroneous and illegal. The HighCourt observed that in penalty proceedings the burden wasupon the assessee to prove that he acted bonafide andthere was no fraud or misrepresentation on his part and forthose reasons the penalty could not be imposed. The HighCourt, after recording its deliberated findings, observed thatthe matter deserved remand to the Appellate Tribunal for afresh decision by the Tribunal. 5.The matter was again heard by the Tribunal and, ,this time, again the Tribunal has observed that the penaltyproceedings were unjusified. 6.Mr. Naik, learnedcounselfortheRevenue,submitsthataperusaloftheJudgmentoftheTribunalwouldshowthatbyitsapproachitismakingtheExplanation appended to Section 271 1( ) nugatory and that itwas trying to go behind beyond the order of the assessment/whichhadattainedfinality. Healsosubmitsthatafterremand of the matter by the High Court the assessee wasduty bound to produce further material before the Tribunal ITR/72/1995 toshowthat itscasewasfallingwithintheExplanationappended to Section 271 1( ) and if such material was notproduced then penalty proceedings could not be quashed. 7.TheHighCourt, intheearlierdecision, hasobserved that, the Tribunal did not examine the questionwhether the income returned by the assessee was bonafideand proper the facts and circumstances which weighed with, theInspectingAssistantCommissionerwerenotproperlyappreciated and considered by the Tribunal, addition madeto the total income of the assessee on account of the bookresults disclosed by the assessee not being amenable toverificationwasnotthesolegroundforbasisonwhichpenaltywasleviedbytheInspectingAssistantCommissioner, the past history of assessee's persistence inmaintainingthebooksofaccountsinthesamemannerthough they were found unreliable was one of the factorswhich had gone into consideration in levying penalty, andthis factor had been completely overlooked by the TribunalwhilesettingasidetheorderoftheInspectingAssistantCommissioner and cancelling the penalty imposed by him. 8.We have gone through the order passed by theTribunal. With due respect to the Tribunal, we must saythat it has ignored the mandatory direction issued by thisCourt. Notonlythis, ithasconvenientlyignoredthe ITR/72/19956/11JUDGMENT observationsmadebythisCourtbynottakingintoconsiderationthefindingsrecordedbytheInspectingAssistant Commissioner and the reasons which persuadedhim to culminate the proceedings against the interests ofthe assessee, the Tribunal also did not consider the effectofandthefactthattheassesseewaspersistinginmaintainingthebooksofaccountsinthesamemannerwhichwere, fortheearlierassessmentyears, foundunreliable. Unfortunately, the Tribunal, for the reasons bestknown to it has observed the order passed by this Court in , its complete breach. Section 271 [as applicable ], necessaryfor this order would read as under, ; Sec 271. ( ). 1If the Income Tax Officer orthe Appellate Assistant Commissioner, inthe course of any proceedings under thisAct is satisfied that any person____, ( )chas concealed the particulars ofhisincomeorfurnishedinaccurateparticularsofsuchincome, he may direct that such person shall payby way of penalty __, (iii)inthecasesreferredtoinclause ( ), cinadditiontoanytaxpayablebyhim, asumclause ( ), cinadditiontoanytaxpayablebyhim, asum whichshallnotbelessthantwentypercent, butwhichshall not exceedone and ahalf times the amount of thetax, if any, which would havebeen avoided if the income asreturnedbysuchpersonhadbeenacceptedasthecorrectincome '. Sec 271. ( ). 1If the Income Tax Officer orthe Appellate Assistant Commissioner, inthe course of any proceedings under thisAct is satisfied that any person____, ( )chas concealed the particulars ofhisincomeorfurnishedinaccurateparticularsofsuchincome, he may direct that such person shall payby way of penalty __, (iii)inthecasesreferredtoinclause ( ), cinadditiontoanytaxpayablebyhim, asumclause ( ), cinadditiontoanytaxpayablebyhim, asum whichshallnotbelessthantwentypercent, butwhichshall not exceedone and ahalf times the amount of thetax, if any, which would havebeen avoided if the income asreturnedbysuchpersonhadbeenacceptedasthecorrectincome '. Explanation ___.Wherethetotalincomereturnedbyanypersonislessthaneightypercentofthetotalincome(hereinafter in this Explanationreferred toas the correct income) as assessed undersection 143 or section 144 or section 147(reducedbytheexpenditureincurredbonafidebyhimforthepurposeofmaking or earning any income included inthetotalincomebutwhichhasbeendisallowed as a deduction), such personshall, unless he proves that the failure toreturn the correct income did not arisefromanyfraudoranygrossorwilfulneglect on his part, be deemed to haveconcealed the particulars of his income orfurnished inaccurate particulars of such income for the purpose of clause ( )c-of this sub section '. 9.Afterconsideringtheprosandconsandthefoundationonwhichthepenaltyproceedingswere ITR/72/19958/11JUDGMENT commenced, the High Court recorded its opinion that theassessee was a persistent defaulter for earlier years, it did-not submit its income tax returns and every year there was, an addition to the income by way of some percentage. TheHigh Court observed that if, that was so then this conduct, of the assessee ought to have been taken into considerationby the Tribunal. Explaining the scope of Explanation, theHigh Court observed that, if the assessee fails to dischargethe burden cast upon him that the action was bona fide,then the Explanation would not provide any protection, andthe penalty proceedings would be held to be valid. 10.In the present matter, after the remand by theHighCourt, thepartiesdidnotleadanyevidence, theassessee did not produce any further material to show thathisactionwasbonafideoritwasnotmakinganymisrepresentation or there was no gross or wilful neglect on, its part. The Tribunal had simply held that the InspectingAssistant Commissionercould not rely upon the report ofthe Auditor when the report observed that the sale slips fora particular day could not be produced as the slips werethousands in number. The Tribunal also observed that therewasmateriallacunaintheassessmentproceedingslessrealising that the assessment proceedings came to an end,they attained finality as the assessee was feeling content.The assessment proceedings and the order framed by the ITR/72/19959/11JUDGMENT AssessmentOfficer, adding20% incometothereturnedincome, was never challenged by the assessee. This wasnot a case for one year only but it was a repeated andpersistent manner in which the accounts were maintained.The Audit Report was relied upon by the assessee himselfand on the strength of that Report he wanted to show tothe Assessing Officer that the returned income was properlyshownandtherewasnoconcealment. Wecouldunderstand that there was a bona fide mistake or lapse onthe part of the assessee and that there was no fraud orgross or wilful neglect on its partif the case was foroneyear only. If for six years the accounts were maintained inthe same form and every year assessments were framedwith the help and assistance of Section 145 1( ) of the Act,-then at least some order should have worked as an eyeopenerfortheassessee. Everyyeartheassesseewasrepeating the same trend and still it wanted to say that ithad not concealed the income or there was no fraud orgross or wilful neglect on its part. 11.Assuming for a minute that there was no fraudonitspart, butpresentwouldbeacasewheretheReturned income was not properly shown because of thegross and or wilful neglect on the part of the assessee/. Iffor the first year the Assessing Officer held that the manner, in which the accounts were maintained was not proper then, ITR/72/1995 the accounts were required to be maintained properly forthe following years. In any case, if six lapses have beencommitted by the assessee that too on the same line then, , it would be a gross and or wilful neglect on its part/. 12.TheTribunal, ononside, wasreferringtotheobservations of the Court to the effect that the assesseehad failed to discharge the burden which lie on it under theExplanation but on the other handthe Tribunal held thattheburdenwasupontheRevenuetoprovethattheassessee was guilty of fraud or gross or wilful neglect. Thisapproach of the Tribunal is patently perverse. On neglect,the Tribunalobserved that there was no gross or wilfulneglect on the part of the assessee this again wasillegal.The Tribunal was also unjustified in holding that the mattercould be decided on the strength of the material availablein form of diaries. If the income had to be assessed underSection145 1( ), thenthepresumptionwouldbethattheincome was not properly Returned and if the very sameconduct is repeated for the following years then there is no, escape from the clutches of the words 'gross wilful neglect'/on the part of the assessee. Even otherwise, the Tribunalwas unjustified in holding that imposition of the penalty maynot be possible for a particular assessment year in view ofthe persistent neglect for past years. 11/11JUDGMENT 13.Takingintoconsiderationthetotalityofthecircumstances, the observations made by this Court, in theearlier proceedings between the same parties for the sameyears, weareoftheopinionthattheTribunalwasunjustified in interfering in the matter. 14.TheReferenceisansweredinfavouroftheRevenue The order passed by the Tribunal is quashed. . The Reference stands disposed of accordingly. No costs. [ R.S. Garg, J. ] RMR. [ M.R. Shah, J. ]