IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No 185 of 1983 For Approval and Signature: Hon'ble MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE A.R.DAVE ============================================================ 1. Whether Reporters of Local Papers may be allowed to see the judgements? 2. To be referred to the Reporter or not? 3. Whether Their Lordships wish to see the fair copy of the judgement? 4. Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? 5. Whether it is to be circulated to the Civil Judge? -------------------------------------------------------------- A M SHAH & COMPANY Versus COMMISSIONER OF INCOME-TAX -------------------------------------------------------------- Appearance: MR SN SOPARKAR with MR MK KAZI, Advocate for Petitioner MR MJ THAKORE, with MR MANISH R BHATT Advocates for Respondent -------------------------------------------------------------- CORAM : MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE A.R.DAVE Date of decision: 29/08/98 ORAL JUDGEMENT (Per R.K.Abichandani,J.) The Income Tax Appellate Tribunal, Ahmedabad Bench "A", has referredthe following questions for the opinion of this Court under Section 256(1) of the Income Tax Act, 1961. Assessment Year 1970-71: (1) "Whether on the facts and circumstances of the case the Tribunal was right in law in upholding levy of penalty in respect of additions mentioned hereunder:- (a) in respect of addition of Rs. 6,396.00 (b) In respect of addition of Rs. 37,535.00 out of Rs. 52,535.00 being addition restored by the Tribunal though deleted by the AAC." Assessment Year 1971-72: "Whether on facts and in the circumstances of the case the Tribunal was justified in law in upholding penalty of Rs. 1,16,754.00 under the provisions of Section 271(1)(c) of the Act." Assessment Years 197-71 and 1971-72: (1) "Whether on the facts and circumstances of the case the Tribunal was right in law in upholding the order of the IAC imposing penalty on the ground that the assessee has concealed the particulars of income, furnished inaccurate particulars of income within the meaning of Section 271 (1)(c) of the Act or in the alternative was liable to penalty on the ground that there was gross or wilful neglect on the part of the assessee in not disclosing the correct income within the meaning of Explanation to Section 271(1)(c) of the Act" (2) "Whether the Tribunal was right in upholding the order of the IAC on the ground that the directions issued by the IAC to the ITO to impose penalty was not fatal to the penalty proceedings for both the years." 2. The assessee is a firm which, at the relevant time, carried on business in purchase and sale of ball bearings, mill stores etc. on retail basis. For the Assessment Year 1970-71, the assessee had disclosed the sales of Rs. 2,78,426.00 with gross profit of 23 per cent. The ITO subjected the books of account of the assessee to a detailed scrutiny and as a result, found that there were substantial discrepancies by way of manipulation of stocks, omission of sales, inflation of purchases, making out of bogus bills etc. He accordingly brought to tax a sum of Rs. 1,72,775.00 by his assessment order dated 31st August, 1973, as per the details mentioned in the order. Out of the seven items mentioned and which are reproduced by the Tribunal in its order, we are concerned for the purpose of the present proceedings, with the item of cash purchase without proof, of Rs. 9,987.00, which was at serial No.3 and the item of Rs. 37,535.00, which was at serial No.5, which related to under-statement of the closing stock. The ITO, by that order, initiated action for imposition of penalty under Section 271(1)(c) of the Act and referred the matter to the IAC for further imposition of penalty. In appeal, the AAC by his order dated 2.2.1974, upheld certain additions including Rs. 6,396.00 out of the addition of Rs. 9,987.00 and deleted other additions including the amount of Rs. 37,535.00, which related to under statement of closing stock. In the further appeal before the Tribunal in those quantum proceedings, the Tribunal by its order dated 7th March, 1980, upheld the additions which were sustained by the AAC and restored the addition of Rs. 37,535.00 of the said item No.5, which was deleted by the AAC. Over and above this, the Tribunal also made an addition of Rs. 15,000.00 on the basis that since the purchases were not traceable in the closing stock and sales, the natural inference was that the goods have been sold outside the books and since the price at which they were sold was not known, the Tribunal made the addition on account of the realisable profit on these purchases arriving at the estimated figure of Rs. 15,000.00 and thus, while sustaining the addition to the extent of Rs. 37,535.00 with which we are concerned in these proceedings, adding a further sum of Rs. 15,000.00, which admittedly is not the subject matter of the present proceedings. 3. The IAC to whom the matter was referred by the ITO, who initiated action for imposition of penalty under Section 271(1)(c) of the Act, took up the matter for his consideration for imposition of penalty after the decision of the Tribunal in the quantum proceedings was received. In order to bring to forefront the basis on which the penalty proceedings were initiated by the ITO, we may at this stage refer to the assessment order in respect of the said year 1970-71 made by the ITO on 31.3.1973, which is at annexure "D" in the paper book. In this assessment order, the ITO has, in details, noted the discrepancies and referred to the doubtful purchases made from various parties and to the fact that for reasons mentioned in paragraph 3 thereof, the books of accounts were impounded and the stock was got reconstructed brand-wise with the help of the accountants of the assessee. In respect of the cash purchases, while referring to the item of Rs. 9,984.00 relating to 31 cash purchases, it was observed that there were no memos or vouchers, no details as to the nature of goods and no receipts for the payment of the same. It was noted that the assessee's only explanation was that the purchases were genuine, but through oversight, the vouchers were not prepared. The ITO held that obviously this was not a valid explanation and thus, there was no proof or explanation for such purchases. As regards the additions made on account of the value of the stock not being included in the closing stock, which is relatable to the item of Rs. 37,535.00, the ITO first noted the discrepancies in the stock book as stated in paragraph 5 of his order, observing that the scrutiny of reconstructed stock book revealed that there were many sales for which there was no opening stock or corresponding purchases, the doubtful and cash purchases mostly appeared thereafter and after taking out excess sales and adjusting the purchases made thereafter against the sales, it appeared that there remained many items in the stock which were not shown in the closing stock for which there were no purchases. It was observed that a brandwise statement was prepared and checked with the assessee as per the Annexure to the order. The ITO noted that the list of closing stock was at the end of the ledger and observed that discrepancies were brought to the notice of the assessee by letter dated 18.11.1972, to which a reply was sent on 28.11.1972 stating that the assessee had to sell the goods and prepare the sale bills earlier while the purchase bills were received thereafter. It was observed that the assessee was unable to produce any evidence to show that in fact, he had received goods earlier on approval basis. It was also observed that there were in fact cash purchases without names on a large scale and doubtful purchases from four parties to the extent of Rs. 28,774.00 and Rs. 96,148.00 respectively. The explanation given by the assessee was found to be flimsy and not acceptable. As regards the other explanation regarding the group of brands, it was held that, that was also not acceptable as it was against the entries in the stock book of the assessee itself where brands are mentioned for each purchases and sale with different rates. It was observed that the assessee had with his letter dated 29.3.1973 given a quantity statement not grouping the brands but grouping several numbers including all the brands of each number together and thus, the assessee himself was not in a position to tally the quantity of a given number grouping several brands thereof. It was held that the explanation of the assessee was false as per the assessee's own quantity statement filed on 29.3.1973. It was therefore held that there were sales of Rs. 81,731.00, for which there were no details of acquisition and further that there were items costing Rs. 68,087.00, which should have been shown in the closing stock but had not been shown, as well as items shown in the closing stock costing Rs. 11954.00, which did not come from any opening stock or purchases. The ITO in his conclusions, while referring to the item not shown in the closing stock by the assessee to the tune of Rs. 68,067.00 (Clause 9 of Annexure attached with the order) found that the unexplained purchases came to Rs. 30,532.00 (as per Clause 11 of the Annexure attached with the order) and this debit was therefore added to the total income of the assessee as unproved and as the assessee himself had not shown the same in the closing stock proving that the debit of Rs 30,532.00 was wrong. The remaining amount of the items which were not shown in the closing stock (as per Clause 9 of the Annexure attached with the order) i.e Rs.37,535.00 out of the total amount of Rs. 68,067.00 was added to the total income of the assessee as under-statement of closing stock, in view of the ITO's finding out that the said amount which was included in the items of Rs. 68,067.00 which should have been shown in the closing stock, was not so shown. The question of the item being ascertained at the stage of closing of the stock and not being found there, clearly postulates that there were no sales of such item, because, if sales were already effected, then there would be no question of such item being shown in the closing stock and no need for an observation that the item should have been shown in the closing stock, but was not shown. It is in this context that in the quantum appeal before the Tribunal, it was noted that as regards the verifiable purchase of Rs. 37,535.00, though they were recorded in the books, they were not traceable in the sales or closing stock. It was held that so far as the purchases were not traceable in closing stock and sales, the natural inference was that the purchased goods were sold outside the books. We have narrated above the basis of initiation of the penalty proceedings reflecting from the order of the ITO as regards the item of Rs, 37,535.00 viz. - that though purchases were shown, the closing stock did not disclose the value of the goods to the said extent, which means that the sales were also not shown, since contentions were canvassed in respect of that item overlooking this basis which is reflected from the order of the ITO, as we will hereafter deal. 4. As regards the Assessment Year 1971-72, the ITO had found in his order dated 17.3.1975 while dealing with the return of income in which the assessee had declared total income of Rs. 43,392.00 that there were serious discrepancies in the stock book, purchases etc. and that the assessee had not entered all sales and purchases in the books of accounts. It was further found that in order to reduce the income earned, the assessee had resorted to, claim for bogus purchases and non-recording of purchases either in sales or stock. It was also found that to adjust the gross profit and quantity account and to bring in certain undisclosed stocks as excess, stocks were shown in regard to certain items. However, the assessee was unable to explain these discrepancies. The Income Tax Officer therefore, concluded that additions as worked out in the assessment order totalling to Rs. 1,92,538.00 were called for. In view of the defects noticed by the ITO, he concluded that real profit could not be ascertained from the books. He therefore, estimated a turnover of Rs. 6 lacs and gross profit at 50 per cent, and made an addition of Rs. 2,06,754.00. The ITO had restricted the addition to higher of the two amounts viz. the gross profit addition in order to avoid double taxation. The matter was carried in appeal before the AAC, who reduced the rate of gross profit to 35 per cent while retaining the estimated turn over and granted the consequential relief. In further appeal, the Tribunal upheld the decision of the AAC. 5. The IAC in his order made under Section 271(1)(c) of the Act on 22.9.1980, for the A.Y 197-71 held in respect of the amount of Rs. 6,396.00, being item of cash purchases without proof, that these purchases were bogus and in the nature of inflation and therefore, the amount represented concealed income of the assessee. As regards under statement of closing stock amounting to Rs. 52,535.00, it was noticed that it comprised of two items namely Rs. 37,535.00 being additions made by the ITO and sustained by the Tribunal and Rs. 15,000.00 being gross profit estimated by the Tribunal. The IAC relying on the order of the Tribunal in the quantum appeal, held that levy of penalty on the said amounts was justified. He found that in view of various discrepancies, errors, omissions and manipulations and want of supportive evidence in regard to various items of purchases and or sales or stock, the assessee's case clearly fell within the mischief of penal provision. He therefore, imposed penalty of Rs. 75,400.00 so far as Assessment Year 1970-71 was concerned. As regards Assessment Year 1971-72, the IAC came to the conclusion that the assessee's case was fully covered by the explanation to Section 271(1)(c) of the Act, in view of the defects mentioned by the ITO, which we have noted above. He therefore, imposed penalty of Rs. 1,16,754.00 on the assessee. 6. Being aggrieved by the penalty orders made in respect of the two assessment years i.e. 1970-71 and 1971-72, the assessee approached the Tribunal and the Tribunal after considering the rival submissions, held as regards the assessment year 1970-71 that the amount of Rs. 6,897.00 which represented inflation in purchases resulting in reduction of taxable income of the assessee was clearly exigible to penalty. So far as the item of Rs. 52,535.00 was concerned, which included the item of profit element estimated by the Tribunal in the quantum appeal of Rs. 15,000.00, over and above the item of Rs. 37,537.00 of the value of goods restored by the Tribunal in the quantum appeal, the Tribunal held that the levy of penalty on the sum of Rs. 37,537.00 was justified on the facts of the case and upheld the decision of the IAC to that extent. As regards the amount of Rs. 15,000.00 which was added in the quantum appeal by the Tribunal by way of the estimated possible realisation of profit from the sale of the stock, which was not disclosed by the assessee and which was inferred to have been sold, it was held that though the addition might be justified in the quantum appeal, the said amount was not exigible to penalty in view of the decision of the Supreme Court in D.M. Manasvi Vs. Commissioner of Income Tax, Gujarat II, reported in 86 ITR 557 and of the Gujarat High Court in the case of Commissioner of Income Tax, Gujarat I Vs. Lakhdhir Lalji, reported in 85 ITR 77. 7. As regards the Assessment Year 1971-72, the Tribunal observed that the ITO on detailed enquiries found that there were bogus purchases, the purchases not reflected in sales or closing stock and also cash purchases, and unaccounted for purchases amounting to Rs. 1,92,538.00 and had adopted the course of making addition by estimating the gross profit as also the turn over. It was noted that the addition was not the one made for want of verificatory records but based on specific defects pointed out by the ITO. In other words, the gross profit addition which was made in lieu of specific additions noted by the ITO was based on specific defects such as discrepancies and manipulations in the accounts noted in great detail by the ITO in his order. Relying upon the decision of this Court in the case of CIT Vs. S.P. Bhatt, reported in 97 ITR 440, the Tribunal therefore, up-held the decision of the IAC for imposing the penalty for the Assessment Year 1971-72. 8. It was also contended before the Tribunal that the IAC himself had not levied the penalty, but had directed the ITO to do so and the Tribunal held that though the order was not happily worded, the proceedings were not vitiated and that it really amounted to imposition of penalty by the IAC. The Tribunal found that the IAC who had jurisdiction to levy the penalty, had exercised his jurisdiction to levy that penalty in the course of the proceedings, which were conducted by him. The Tribunal therefore, partly allowed the appeal in respect of the Assessment Year 1970-71 and dismissed it in respect of the Assessment Year 1971-72, by its order dated 5th March, 1972, which has led to the aforesaid questions being referred for the opinion of this Court. 9. It has been contended by the learned Counsel appearing for the assessee that it was not possible having regard to the nature of purchases and sales of the type of goods i.e. ball bearings, mill stores etc. which were made by the assessee, to maintain the quality record. It was argued that the basis for initiation of the penalty in respect of the year 1970-71 was inter-alia under statement of the closing stock to the extent of Rs. 37,535.00 and because in the quantum appeal the Tribunal had estimated the profit of Rs. 15,000.00 on the footing that the goods must have been sold away, it should follow that the basis that the goods were not shown in the closing stock on which the penalty proceedings were initiated by the ITO was changed and the basis now as per the decision of the Tribunal in quantum appeal was, non-disclosure of sale. It was contended that since the basis of levy of penalty had thus undergone a change in the quantum appeal, the penalty could not be sustained because under-valuation of the closing stock and suppression of sales cannot co-exist. Reliance was placed by the learned Counsel on the decision of this Court in CIT Vs. Lakhdhir Lalji (supra) in support of his submission. In Lakhdir Lalji's case, the ITO had added a sum of Rs. 58,000.00 holding that the assessee had realised it by sale of 1,383 bags of garlic, but concealed the same. Notice to the assessee was issued under Section 274 of the Act for levying penalty for concealing of income. On appeal from the assessment order, the AAC held that 1,383 bags of garlic were included in the stock of the assessee and that a sum of Rs. 34,000.00 should be added on the footing of under-valuation of stock and not Rs. 58,000.00. The IAC in the penalty proceedings took note of the AAC's order and levied a penalty of Rs. 74,000.00 on the footing that the assessee had deliberately furnished inaccurate particulars of his income. The Appellate Tribunal held that the order of the IAC was without jurisdiction as his jurisdiction was restricted to those items of concealment of income in regard to which the Income Tax Officer was satisfied that there was concealment of income. The High Court held that penalty proceedings had been commenced against the assessee on a particular footing, viz., concealment of particulars of income, but the final conclusion for levying the penalty was based on a different footing altogether viz., on the footing of furnishing inaccurate particulars of income. It was held that under these circumstances, it could not be said that the assessee had been given a reasonable opportunity of being heard before the order imposing the penalty was passed. The very basis for the penalty proceedings against the assessee initiated by the Income Tax Officer disappeared when the Appellate Assistant Commissioner held that there was no suppression of income by the assessee. The conclusion of the Tribunal that the Inspecting Assistant Commissioner had no jurisdiction to impose a penalty under Section 271(1)(c) for concealment of income was therefore, held to be correct. The learned Counsel also read before us the decisions of this Court in CIT, Gujarat-III Vs. Manu Engineering Works, reported in 122 ITR 306 and K.M. Bhatia (Quarry) Vs. Commissioner of Income Tax, reported in 193 ITR 397, in which the ratio of the decision of this Court in Lakhdhir Lalji's case was reiterated. There can obviously be no dispute about a proposition that if the very basis for the penalty proceedings against the assessee initiated by the ITO disappeared, then the penalty imposed on a different footing altogether cannot be sustained. As regards the Assessment Year 1971-72, the learned Counsel for the assessee contended that since the Department had rejected the books of account and made lumpsum addition which was reduced in appeal, it was purely a case of estimation attracting no penalty provision. It was contended that the fact that the addition ultimately sustained was much lower than the amount which according to the ITO was required to be added to the income itself, shows that the finding of bogus purchases were not approved by the Appellate Authority. It was contended that since the addition was on pure estimate basis and there being no proof of any fraud committed by the assessee, the penalty cannot be sustained. Reliance was placed in support of this contention on the decision of this Court in CIT Vs. S.P.Bhatt, reported in 97 ITR 440, in which case this Court held that the conditions which attract the applicability of Section 271(1)(c) of the Act was that the ITO should be satisfied in the course of any proceeding under the Act that any person had concealed the particulars of his income or furnished inaccurate particulars of such income. The Explanation to that provision, which was introduced by the Finance Act, 1964, provides that where the total income returned is less than eighty per cent of the total income assessed, the assessee shall, unless he proves that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income within the meaning of Section 271(1)(c) of the Act. The Explanation creates a legal fiction if the condition of its applicability is satisfied. It was held that the condition is an objective condition, namely - that the total income returned by the assessee should be less than eighty per cent of the total income assessed, and the assessee is straightway brought within the penal provision in Section 271(1)(c) of the Act. However, this legal fiction could be displaced if the assessee proves that the failure to return the correct income did not arise due to any fraud or gross or wilful neglect on his part. In that case, the finding reached by the Tribunal was that there was no fraud or gross or wilful neglect on the part of the assessee. It was not the case of the ITO that any particular entries in the books of account were