Ita/7/2002 Of The Commissioner Of Incometax v. M/S.bachu & Co., Calicut

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN TUESDAY, THE 3RD JUNE 2008 / 13TH JYAISHTA 1930 ITA.No. 7 of 2002() ------------------- (AGAINST THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL IN ITA.565/C/1996DATED 25/06/2001) .................... APPELLANT/: APPELLANT: --------------------------- THE COMMISSIONER OF INCOME TAX, CALICUT. BY ADV. SRI.P.K.R.MENON(SR.),SC FOR IT SRI.GEORGE K. GEORGE, SC FOR IT RESPONDENT/RESPONDENTS: ------------- M/S. BACHU & CO., BIG BAZAR, CALICUT. BY ADV. SRI.KMV.PANDALAI FOR RESPONDENT THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 03/06/2008, ALONG WITH ITA NO. 78 OF 2002 THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.N.RAMACHANDRAN NAIR & V.K.MOHANAN, JJ. ------------------------- I.T.A. Nos. 7 & 78 of 2002 --------------------------------- Dated, this the 3[rd] day of June, 2008 J U D G M E N T Ramachandran Nair, J. These appeals are filed by the revenue under Section 260A ofthe Income Tax Act against the orders of the Income Tax AppellateTribunal confirming cancellation of penalty levied on the assesseeunder Section 271(1)(c) of the Income Tax Act for the assessmentyears 1988-89 & 1990-91. 2.We heard learned senior counsel appearing for therevenue and learned counsel appearing for the respondentassessee. 3.The assessee filed return declaring income ofRs.1,32,227/- and Rs.3,80,000/- for the assessment years 1988-89and 1990-91 respectively. The business premises of the assessee,who was engaged mainly in distribution of edible oil, was searchedon 18/08/1990. During the course of search, the authorised officerseized a sum of Rs.8,35,000/- and issued prohibitory order underSection 132(3) for freezing the bank deposits totalingRs.12,25,000/-. Even though, originally, after search, income for I.T.A.Nos.7 & 78/2002 -2- the assessment year 1988-89 was determined at Rs.19,83,770/-,the same was set aside by the Commissioner of Income Tax(Appeals) and the assessment was remitted back for re-assessment. The Assessing Officer appointed an auditor, and gotthe assessee's accounts audited by him, under Section 142(2A) ofthe Act. In the audit report submitted by the said auditor, he hadbrought out some points of discrepancies, suppressions and defectsin the accounts. The Assessing Officer, on the basis of the auditreport, refixed the income at Rs.28,56,700/-. However, in theappeal filed by the assessee, the Commissioner of Income Tax(Appeals) reduced the estimation of income at Rs.6,00,000/- asagainst Rs.1,32,227/- returned by the assessee. 4.For the assessment year 1990-91, the return itself wasfiled after the date of search and assessee has returned an incomeof Rs.3,80,000/-. According to the report of the auditor appointedby the Assessing Officer under Section 142(2A) of the IT Act, thetaxable income of the assessee should be Rs.9,00,833.36.However, the Assessing Officer, based on the materials available,such as investments, difference in credit balance in the account etc.estimated the income at Rs.1,36,69,740/-. The appeal filed against I.T.A.Nos.7 & 78/2002 -3- the assessment was substantially allowed by the Commissioner ofIncome Tax (Appeals) by re-fixing the income at Rs.10,00,000/-. 4.For the assessment year 1990-91, the return itself wasfiled after the date of search and assessee has returned an incomeof Rs.3,80,000/-. According to the report of the auditor appointedby the Assessing Officer under Section 142(2A) of the IT Act, thetaxable income of the assessee should be Rs.9,00,833.36.However, the Assessing Officer, based on the materials available,such as investments, difference in credit balance in the account etc.estimated the income at Rs.1,36,69,740/-. The appeal filed against I.T.A.Nos.7 & 78/2002 -3- the assessment was substantially allowed by the Commissioner ofIncome Tax (Appeals) by re-fixing the income at Rs.10,00,000/-. 5.The assessee as well as the Department accepted theassessment modified by the CIT(Appeals) in first appeal,whereunder he refixed the income at Rs.6,00,000/- andRs.10,00,000/- respectively for the assessment years 1988-89 and1990-91 as against the income returned at Rs.1,32,227/- andRs.3,80,000/-. It is seen that the income re-fixed by theCommissioner (Appeals) for the assessment year 1988-89 is overfour times the income returned by the assessee and for theassessment year 1990-91 it is about three times the incomereturned by the assessee. It is pertinent to note that the return forthe year 1990-91 was filed after the search wherein irregularitieswere noticed and the Assessing Officer took action for seizure ofcash and freezing the bank account. Assessee raised objectionagainst notice issued under Section 271(1)(c) proposing to levypenalty for the concealment of income. However, the AssessingOfficer overruled the objection and imposed penalty ofRs.1,40,000/- and Rs.2,00,000/- for the assessment years 1988-89and 1990-91 respectively. The penalty levied is not in excess of the I.T.A.Nos.7 & 78/2002 -4- minimum penalty that could be levied under Section 271(1)(c) ofthe Income Tax Act. The appeals filed by the assessee againstimposition of penalty were allowed by the CIT(Appeals) holding thatno concealment was established when assessments were modifiedby the CIT (Appeals) by estimating income. The appeals filed bythe Revenue before the Income Tax Appellate Tribunal against theabove CIT (Appeal)'s order were unsuccessful and hence theseIncome Tax Appeals are filed by the Revenue before this Courtunder Section 260A of the Income Tax Act. 6.Even though several questions are raised in the appeals,we find the substantial question arising from the order of theTribunal is whether the Tribunal was justified in confirming theorder of the CIT(Appeals) in cancelling the penalty. Penaltyis imposed on the basis that there was difference between incomeassessed and the income returned which is concealed income byvirtue of operation of Explanation 1B to Section 271(1)(c) of the Actif the assessee fails to offer any explanation. 7.Learned senior counsel for the revenue relied on thedecisions of the Supreme Court in K.P.MadhusudhananVs.Commissioner of Income Tax, reported in 251 ITR 99, and that I.T.A.Nos.7 & 78/2002 -5- 6.Even though several questions are raised in the appeals,we find the substantial question arising from the order of theTribunal is whether the Tribunal was justified in confirming theorder of the CIT(Appeals) in cancelling the penalty. Penaltyis imposed on the basis that there was difference between incomeassessed and the income returned which is concealed income byvirtue of operation of Explanation 1B to Section 271(1)(c) of the Actif the assessee fails to offer any explanation. 7.Learned senior counsel for the revenue relied on thedecisions of the Supreme Court in K.P.MadhusudhananVs.Commissioner of Income Tax, reported in 251 ITR 99, and that I.T.A.Nos.7 & 78/2002 -5- of this Court in Deputy Commissioner of Income TaxVs.K.Suresh Kumar, reported in 253 ITR 640, and contended that byvirtue of Explanation 1B to Section 271(1)(c), the differencebetween the assessed income and the income returned would betreated as concealed income, if the assessee fails to offer anyexplanation or if the explanation offered is either false or lacks anybonafides. On the other hand, learned counsel for the assesseereferred to the orders of the CIT (Appeals) against the assessmentsand based on the findings therein, contended that the specificadditions have been cancelled by the CIT (Appeals) and what hesustained is only the estimated income for both the assessmentyears. We are unable to uphold the order of the Tribunal sustainingthe order of the CIT (Appeals) for the main reason that the CIT(Appeals) cancelled the penalty by holding that the concealment isnot proved by the Assessing Officer under the main Section. TheCIT (Appeals) took the view that the Assessing Officer has notresorted to Explanation 1B to Section 271(1)(c) for levying penalty.However, on going through the penalty order, we notice that theAssessing Officer has levied penalty with reference to differencebetween the income assessed and the income returned by the -6- assessee, even though Explanation 1B to Section 271(1)(c) is notspecifically referred to by him. As per the decision above referred,the Supreme Court has clearly stated that the explanation is part ofthe Section and when notice is issued proposing penalty, it is for theassessee to defend the case with reference to the provisions of thesection under which penalty is proposed, which includes explanationIB to Section 271(1)(c). Admittedly, assessee's accounts wereunreliable and the same rather stands accepted by the assesseeitself. During search, the Assessing Officer has established boguscredit entries and suppression of accounts and the same were re-confirmed in the audit report obtained by the Assessing Officer byappointing an auditor under Section 142(2A) of the Act. Similarly,the Assessing Officer established a case of unexplained investmentin the name of the partners, relatives and unexplained expenditureby them. Even though the assessments were modified in appeal bycancelling the specific additions but by estimating income, the netresult is concealment of income in terms of Explanation 1B toSection 271(1)(c) of the Act because the income estimated by theCIT (Appeals), which has become final for the year 1988-89 is overfour times of the returned income and for the year 1990-91 it is I.T.A.Nos.7 & 78/2002 -7- I.T.A.Nos.7 & 78/2002 -7- around three times of the returned income. Therefore, by virtue ofoperation of Explanation 1B to Section 271(1)(c), the assessee isdeemed to have concealed the particulars of the difference in theincome assessed and the income returned and it is for the assesseeto offer reasonable explanation. It is seen from the records andorders that the earlier explanation of the assessee was that thespecific additions have been cancelled by the appellate authorityand the additional income assessed is based on estimation made bythe CIT (Appeal). We do not find this is an acceptable explanationfor the difference in income assessed and the income returned andtherefore, the net result is that the assessee has not offered anyreasonable or bonafide explanation as required in Explanation 1B toSection 271(1)(c) of the Act to avoid penalty. Consequently, levyof penalty imposed for concealment of income for the year 1988-89is perfectly justified. For the year 1990-91, assessee filed returnafter the date of search and detection of irregularities and thereforepenalty was rightly levied. We, therefore, set aside the orders ofthe Tribunal and also of the CIT (Appeals) and uphold the penaltylevied on assessee under Section 271(1)(c). So far as the quantumof penalty is concerned, there is no scope for this Court to interfere I.T.A.Nos.7 & 78/2002 -8- with the same, or remand the matter for reconsideration byappellate authority because penalty levied is not much in excess ofthe minimum penalty that could be levied under the Section. We,therefore, allow the appeals filed by the revenue by vacating theorders of the Tribunal and that of CIT(Appeals) and restoring theoriginal penalty orders issued by the Assessing Officer. (C.N.RAMACHANDRAN NAIR, JUDGE) (V.K.MOHANAN, JUDGE)