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/1996 DATED 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 3rd 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 of the Income Tax Act against the orders of the Income Tax Appellate Tribunal confirming cancellation of penalty levied on the assessee under Section 271(1)(c) of the Income Tax Act for the assessment years 1988-89 & 1990-91. 2. We heard learned senior counsel appearing for the revenue and learned counsel appearing for the respondent assessee. 3. The assessee filed return declaring income of Rs.1,32,227/- and Rs.3,80,000/- for the assessment years 1988-89 and 1990-91 respectively. The business premises of the assessee, who was engaged mainly in distribution of edible oil, was searched on 18/08/1990. During the course of search, the authorised officer seized a sum of Rs.8,35,000/- and issued prohibitory order under Section 132(3) for freezing the bank deposits totaling Rs.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 got the assessee's accounts audited by him, under Section 142(2A) of the Act. In the audit report submitted by the said auditor, he had brought out some points of discrepancies, suppressions and defects in the accounts. The Assessing Officer, on the basis of the audit report, refixed the income at Rs.28,56,700/-. However, in the appeal filed by the assessee, the Commissioner of Income Tax (Appeals) reduced the estimation of income at Rs.6,00,000/- as against Rs.1,32,227/- returned by the assessee. 4. For the assessment year 1990-91, the return itself was filed after the date of search and assessee has returned an income of Rs.3,80,000/-. According to the report of the auditor appointed by the Assessing Officer under Section 142(2A) of the IT Act, the taxable 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 of Income Tax (Appeals) by re-fixing the income at Rs.10,00,000/-. 5. The assessee as well as the Department accepted the assessment modified by the CIT(Appeals) in first appeal, whereunder he refixed the income at Rs.6,00,000/- and Rs.10,00,000/- respectively for the assessment years 1988-89 and 1990-91 as against the income returned at Rs.1,32,227/- and Rs.3,80,000/-. It is seen that the income re-fixed by the Commissioner (Appeals) for the assessment year 1988-89 is over four times the income returned by the assessee and for the assessment year 1990-91 it is about three times the income returned by the assessee. It is pertinent to note that the return for the year 1990-91 was filed after the search wherein irregularities were noticed and the Assessing Officer took action for seizure of cash and freezing the bank account. Assessee raised objection against notice issued under Section 271(1)(c) proposing to levy penalty for the concealment of income. However, the Assessing Officer overruled the objection and imposed penalty of Rs.1,40,000/- and Rs.2,00,000/- for the assessment years 1988-89 and 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) of the Income Tax Act. The appeals filed by the assessee against imposition of penalty were allowed by the CIT(Appeals) holding that no concealment was established when assessments were modified by the CIT (Appeals) by estimating income. The appeals filed by the Revenue before the Income Tax Appellate Tribunal against the above CIT (Appeal)'s order were unsuccessful and hence these Income Tax Appeals are filed by the Revenue before this Court under 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 the Tribunal is whether the Tribunal was justified in confirming the order of the CIT(Appeals) in cancelling the penalty. Penalty is imposed on the basis that there was difference between income assessed and the income returned which is concealed income by virtue of operation of Explanation 1B to Section 271(1)(c) of the Act if the assessee fails to offer any explanation. 7. Learned senior counsel for the revenue relied on the decisions of the Supreme Court in K.P.Madhusudhanan Vs. 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 Tax Vs. K.Suresh Kumar, reported in 253 ITR 640, and contended that by virtue of Explanation 1B to Section 271(1)(c), the difference between the assessed income and the income returned would be treated as concealed income, if the assessee fails to offer any explanation or if the explanation offered is either false or lacks any bonafides. On the other hand, learned counsel for the assessee referred to the orders of the CIT (Appeals) against the assessments and based on the findings therein, contended that the specific additions have been cancelled by the CIT (Appeals) and what he sustained is only the estimated income for both the assessment years. We are unable to uphold the order of the Tribunal sustaining the order of the CIT (Appeals) for the main reason that the CIT (Appeals) cancelled the penalty by holding that the concealment is not proved by the Assessing Officer under the main Section. The CIT (Appeals) took the view that the Assessing Officer has not resorted to Explanation 1B to Section 271(1)(c) for levying penalty. However, on going through the penalty order, we notice that the Assessing Officer has levied penalty with reference to difference between the income assessed and the income returned by the I.T.A.Nos.7 & 78/2002 -6- assessee, even though Explanation 1B to Section 271(1)(c) is not specifically referred to by him. As per the decision above referred, the Supreme Court has clearly stated that the explanation is part of the Section and when notice is issued proposing penalty, it is for the assessee to defend the case with reference to the provisions of the section under which penalty is proposed, which includes explanation IB to Section 271(1)(c). Admittedly, assessee's accounts were unreliable and the same rather stands accepted by the assessee itself. During search, the Assessing Officer has established bogus credit entries and suppression of accounts and the same were re- confirmed in the audit report obtained by the Assessing Officer by appointing an auditor under Section 142(2A) of the Act. Similarly, the Assessing Officer established a case of unexplained investment in the name of the partners, relatives and unexplained expenditure by them. Even though the assessments were modified in appeal by cancelling the specific additions but by estimating income, the net result is concealment of income in terms of Explanation 1B to Section 271(1)(c) of the Act because the income estimated by the CIT (Appeals), which has become final for the year 1988-89 is over four times of the returned income and for the year 1990-91 it is I.T.A.Nos.7 & 78/2002 -7- around three times of the returned income. Therefore, by virtue of operation of Explanation 1B to Section 271(1)(c), the assessee is deemed to have concealed the particulars of the difference in the income assessed and the income returned and it is for the assessee to offer reasonable explanation. It is seen from the records and orders that the earlier explanation of the assessee was that the specific additions have been cancelled by the appellate authority and the additional income assessed is based on estimation made by the CIT (Appeal). We do not find this is an acceptable explanation for the difference in income assessed and the income returned and therefore, the net result is that the assessee has not offered any reasonable or bonafide explanation as required in Explanation 1B to Section 271(1)(c) of the Act to avoid penalty. Consequently, levy of penalty imposed for concealment of income for the year 1988-89 is perfectly justified. For the year 1990-91, assessee filed return after the date of search and detection of irregularities and therefore penalty was rightly levied. We, therefore, set aside the orders of the Tribunal and also of the CIT (Appeals) and uphold the penalty levied on assessee under Section 271(1)(c). So far as the quantum of 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 by appellate authority because penalty levied is not much in excess of the minimum penalty that could be levied under the Section. We, therefore, allow the appeals filed by the revenue by vacating the orders of the Tribunal and that of CIT(Appeals) and restoring the original penalty orders issued by the Assessing Officer. (C.N.RAMACHANDRAN NAIR, JUDGE) (V.K.MOHANAN, JUDGE) jg