-1- IN THE HIGH COURT OF JUDICATURE AT BOMBAY O.O.C.J. Income Tax Reference No. 6 of 1993 Shree Nirmal Commercial Ltd. ) 241/42, "Nirmal" Building ) Backbay Reclamation, Nariman ) Point, Bombay 21 ) ..Applicant vs. Commissioner of Income Tax ) Bombay City IV Bombay ) ..Respondent Mr.S.J.Mehta for applicant. None for respondent. Judgment reserved on: 31.7.2008 Judgment delivered on: 7.8.2008 CORAM: Dr.S.RADHAKRISHNAN AND CORAM: Dr.S.RADHAKRISHNAN AND CORAM: Dr.S.RADHAKRISHNAN AND S.J.KATHAWALLA JJ. S.J.KATHAWALLA JJ. S.J.KATHAWALLA JJ. 7th August, 2008 7th August, 2008 7th August, 2008 J U D G E M E N T: J U D G E M E N T: J U D G E M E N T: (Per S.J.Kathawalla J.) 1. The Income Tax Appellate Tribunal, Mumbai has at the instance of the assessee, referred to this Court the following questions arising out of the order of the Tribunal dated 27th September 1991 in Income Tax Appeal Nos.3301 and 3302/Bom/87 for the Assessment Years 1966-67 and 1967-68. Assessment Years 1966-67 and 1967-68. Assessment Years 1966-67 and 1967-68. Assessment Years 1966-67 and 1967-68. "1. Whether on the facts and in the circumstances of the case, penalty is leviable under section -2- 271(1)(c) of the Income Tax Act, 1961? 2. Whether on the facts and in the circumstances of the case the Tribunal has rightly rejected the contention of the assessee in law that after lapse of 17 years as the assessee could not produce the depositor and accordingly no penalty should have been levied? 3. Whether on the facts and circumstances of the case when the income assessed under section 68 of the Act, penalty under section 271(1)(c) can be levied in law?" 4. Whether on the facts and in the circumstances of the case, the Tribunal was right in confirming the penalty by relying upon the alleged statement made by the depositor in some other proceedings before some other officers? Assessment Years 1967-68 only: Assessment Years 1967-68 only: Assessment Years 1967-68 only: . Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that Explanation to Section 271(1)(c) of the Act was applicable to the assessment year 1967-68?" 2. The facts giving rise to the assessment order for assessment year 1966-67 are as under: (i) For the Assessment year 1966-67 the assessee had on 25.7.1970 filed a return showing "Nil" income. However, under the assessment order, the income determined as total income of the assessee was Rs.2,90,500/-. The said income of Rs.2,90,500/- was included as undisclosed income of the assessee on the ground that the assessee had shown bogus loans from five different parties. The said assessment (original Assessment) was completed on 23rd July 1971. -3- (ii) The original Assessment was thereafter set aside by A.A.C. D-Range, Mumbai vide his order No.DAP-166/71-72 dated 4th March, 1972 with a direction to redo it after giving proper opportunity to the assessee to substantiate its claims. (iii) With a view to give a fresh opportunity to the assessee to substantiate its claims, the assessee was asked by a letter dated 13th August, 1981 (i.e.approximately 10 years from the date of setting aside of the original assessment) to produce all necessary details and evidence in support of its claims in respect of the loans in question. The assessee through its representative appeared before the Income Tax Officer and requested that summonses be issued to the five parties who had advanced loans to the assessee during the relevant Assessment Year and also provided their respective addresses. Out of the five parties/concerns, whose addresses were provided by the assessee to the Income Tax Officer, four of them appeared before the Income Tax Officer and satisfied him that the loans given by them were genuine. Only in one case i.e. the case of M/s Ramgopal Laxminarayan who had stated to have advanced the loan of Rs.50,000/-, the summons was returned back with -4- the postal remarks "unserved". Upon this being pointed out by the Income Tax Officer to the assessee, the assessee submitted that in view of the matter being very old, i.e. more than 16 years had elapsed from the date when the loan was taken by the assessee, it was rather impossible for the assessee to bring the said M/s Ramgopal Laxminarayan before the authority. Since it was the assessee’s case that he had taken loan through a broker, the Income Tax Officer asked him to produce the broker for cross examination. However, the assessee pleaded his helplessness in the matter on similar grounds. These submissions of the assessee were rejected by the Income Tax Officer on the ground that the said M/s Ramgopal Laxminarayan had, earlier confessed that he has not advanced any loan to the assessee. The Assessing Officer thereafter by his order passed in the year 1982 computed the total income of the assessee by adding Rs.50,000/- as income from undisclosed sources to the "Nil" income shown by the assessee. (iv) The assessee thereafter challenged the above quantum order passed in 1982 upto the Income Tax Appellate Tribunal but was unsuccessful. (v) Thereafter in mid June 1985 the Assessing Officer -5- initiated penalty proceedings against the assessee under section 271(1)(c) of the I.T.Act. During the penalty proceedings before the Assessing Officer, the assessee explained that the loan could not be substantiated because of the very long lapse of time. The explanation did not find favour with the Assessing Officer and he invoked the provisions of the Explanation to section 271(1)(c) as it stood between 1st April, 1964 and 31st March, 1976 and levied penalty of Rs.50,000/- against the assessee for the assessment year 1966-67. (vi) The assessee challenged the order of the Assessing Officer before CIT (A) who, inter alia, held that the assessment was set aside on 4th September, 1972 and reassessment was taken up only in 1981 and that after such a long gap it was impossible for any person to establish the genuineness of the transaction. The CIT(A), therefore, cancelled the penalty levied by the Assessing Officer. The said order of CIT(A) was therefore, impugned by the revenue before the Income Tax Appellate Tribunal. (vii) The Appellate Tribunal whilst deciding in favour of the Revenue and against the Assessee held that no weight should be attached to the lapse of time before the original assessment and reassessment. The contention of -6- the assessee as regards lapse of several years between the original assessment and reassessment was also rejected on the ground that the said contention was considered by the Tribunal at the time of deciding the quantum Appeal and the same was rejected even at that time. The Tribunal did not find favour even with the assessee’s contention that no opportunity was allowed to the assessee to cross examine the creditors who had allegedly made a statement before another Assessing Officer that the loan was only a havala entry. The Tribunal also held that explanation to section 271(1)(c) raised a rebuttable presumption in favour of the revenue and onus is on the assessee to rebut it and that the assessee failed to rebut the presumption because of which the penalty was rightly levied. (ix) The Appellate Tribunal as stated above thereafter at the instance of the assessee, has made the above reference to this Court. 4. Assessment Year 1967-68. Assessment Year 1967-68. Assessment Year 1967-68. (i) For the Assessment Year 1967-68, the original assessment was completed on 30th March, 1972. The total income determined was Rs.37,47,450/- Subsequently, A.A.C.Special Range IV, Mumbai vide his order dated 12th -7- April, 1973 had set aside the additions of Rs.1,25,000/- added as cash credits in respect of three parties. As directed by the A.A.C in his said order, a fresh opportunity was given to the assessee by I.T.O’s letter dated 12th August, 1981 to produce necessary details and evidence in support of the claim of genuineness of the said cash credits. The assessee through its representative requested the Assessing Officer to issue summons to the parties whose addresses were provided by the assessee to the officer. The summonses issued to two of the parties were returned back by the postal authorities with the remarks "left place". As far as the third party is concerned, he informed the Assessing Officer that he is 72 years old and that he had preserved the books of account beginning from the Assessment Year 1971-72 onwards and all his previous records were destroyed by him because he never thought that there will be any necessity of production of the same at any time. He, therefore, pleaded his helplessness in complying with the requirement of the summons. However, he stated that he did remember to have had loan transactions with the assessee. (ii) Thereafter the Assessing Officer asked the assessee to produce the three parties before him, but the assessee -8- expressed its helplessness on the same grounds that were stated by the assessee for the Assessment Year 1966-67. The Assessing Officer, therefore, rejected the contention of the assessee and added a sum of Rs.1,25,000/- as income from undisclosed sources to the assessees’ negative/loss income of Rs.4,64,301/- and thereafter computed its total income as negative/loss income of Rs.3,39,301/- This order was challenged by the Assessee upto the Appellate Tribunal and the only relief that the assessee could get was that the sum of Rs.1,25,000/- which was treated as his income from undisclosed sources was reduced to Rs.75,000/- The fact remains that the Income Tax Authorities also computed the total income of the Assessee for the Assessment Year 1967-68 as negative/loss income even after the said addition of Rs. 1,25,000/- as income from undisclosed sources. (iii) The facts pertaining to penalty proceedings initiated against the assessee for the assessment year 1967-68 are identical to that of the assessment year 1966-67 since common orders were passed by Assessing Officer, CIT (A) and Appellate Tribunal in respect of both the assessment years i.e. 1966-67 and 1967-68. Only one additional argument which the assessee had advanced before the Appellate Tribunal pertaining to the A.Y.1967-68 was -9- that the explanation to section 271(1)(c) did not apply for the A.Y.1967-68 because although addition of Rs. 1,25,000/- made by Assessing Officer was more than 20% of the loss returned, the addition as finally sustained of Rs. 75,000/- in the quantum appeal by the Tribunal was less than 20% of the returned loss. The said contention of the assessee was rejected by the Appellate Tribunal. (iv) Thereafter the Tribunal preferred the present reference before this Court raising the questions as set out hereinabove. 5. Mr. Mehta appearing for the Assessee after taking us through section 271 of the Income Tax Act 1961 as it stood prior to its amendment, drew our attention to the Division Bench judgment of this Court in the case of Commissioner of Income Tax Poona Vs. Bhimji Bhanjee and Co. reported in 1984 (Vol.146) ITR 145. In that case, during the course of assessment proceedings under the relevant assessment years, the I.T.O. while scrutinising the books of account had noticed certain cash credited in various accounts. The assessee admitted that there were certain cash credits in its books of account in favour of the named parties. However the assessee was unable to produce -10- evidence to show that the cash credits were genuine. The assessee had not admitted that it had concealed any income. On this the ITO took a view that the assessee had failed to discharge the burden of proof and brought the tax amount of Rs.10,590/- as income of the assessee from undisclosed sources. The IAC proceeded to levy penalty of Rs.10,590/- under amended section 271(1)(c) of the said Act. On an appeal preferred by the Assessee to the Income Tax Appellate Tribunal, the Tribunal allowed the same taking a view that the assessee had not admitted concealment of income and that merely because the amount of Rs.10,590/- was surrendered for taxation by the assessee, this did not ipso facto raise an inference that the assessee admitted that it was his concealed income. From the aforesaid decision of the Tribunal the following question was referred to the Court:- "Whether, on the facts and in the circumstances of the case, the Tribunal has erred in law in holding that the penalty levied on the assessee under section 271(1)(c) of the Act for the assessment year 1968-69 was not sustainable?" The learned Advocate appearing for the revenue while impugning the order of the Appellate Tribunal submitted -11- before the Court that the assessee had in fact admitted concealment of income and hence it was not necessary for the revenue to prove the same. It was submitted by him that in view of this the burden was on the assessee to show that there was no concealment and the conclusion arrived at by the Tribunal was erroneous,. The revenue strongly relied on a decision in the case of Western Automobiles (India) Vs. CIT reported in (1978) 112 ITR 1048 (Bom). In that case when the ITO discovered from the account books of the assessee, loans to the tune of Rs.90,000/- he came to a prima facie conclusion that the loans reflected the concealed income. The assessee firm agreed to the addition of the aforesaid amount of Rs.90,000/- as his business income for that year and addition was made by ITO as the assessee’s concealed income from business and not as income from undisclosed sources. The Court, therefore, was of the view that the facts in Western Automobiles (India) did not apply to the case being decided by them because the assessee had nowhere admitted that it had concealed its income and even the I.T.O. had not added the additional amount as concealed income from business but as from undisclosed sources. This Court, therefore, in the case of Commisioner of Income Tax Poona vs Bhimji Bhanjee and Co.(Supra) decided the above question in negative and in -12- favour of the assessee. Mr. Mehta on behalf of the assessee submitted before us that the decision in Commissioner of Income Tax Poona vs Bhimji Bhanjee & Co. (supra) is clearly applicable to the present case. 6. Mr.Mehta next cited a decision of the Punjab and Haryana High Court in the case of Commissioner of Income Tax Vs.Prithipal Singh and Co. reported in 183 ITR 69. In that case the assessee had filed the return declaring loss of Rs.3,35,830/- The Income Tax Officer vide his order found that it was a case of concealment and suppression of income as the assessee had furnished inaccurate particulars of its income. He computed the assessee’s income at Rs.1,47,978/- and in the course of assessment proceedings started penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961 for the reason that the assessee had grossly understated its income. The assessee went in appeal before the Appellate Assistant Commissioner who determined the loss at Rs.34,164/- against the returned loss of Rs.3,35,830/-In the penalty proceedings initiated the Income Tax Officer imposed penalty of Rs.3,50,000/- for concealment under sec.271(1)(c) of the I.T.Act for that assessment year. The assessee appealed before the Income Tax Appellate Tribunal against imposition of the said penalty which -13- appeal was allowed by the Tribunal holding that no penalty would be imposed upon the assessee when it had returned a loss and it had been assessed finally on a loss figure. Thereafter the Commissioner of Income Tax (Central), Ludhiana moved an application before the Income Tax Appellate Tribunal, Amritsar which referred the following two questions to the Punjab and Haryana High Court. (1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding: (a) that the provisions of the Explanation to section 271(1)(c) will not be attracted to the present case? (b) that the word "income" occurring in clauses (c) and (iii) of section 271(1) refers to a positive income only and not to a loss? 2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in cancelling the penalty order passed by the Inspecting Assistant Commissioner by holding that no penalty could be levied against the assessee?" The Punjab and Haryana High Court answered all the questions set out hereinabove in the negative i.e. in favour of the assessee and against the revenue in the following terms: ""Income" has been defined in section 2(24) of the Act which clearly includes profits, gains, dividends or other benefits derived only. Loss cannot possibly be termed as income. Under section 139(1) of the Act, a person is required to furnish -14- a return only if his total income during the previous year exceeded the maximum amount which is not chargeable to income tax. If the same falls short of the maximum amount which is not chargeable, which has been the case here as per final assessment, he need not file a return. A person who sustains a loss, however, may file a return in view of sub-section (3) of section 139 of the Act if he wants to claim that the loss or any part thereof should be carried forward. The penal provisions of section 271(1)(c), therefore, are attracted only in the case of an assessee having positive income and not loss, as the question of concealment of income to avoid payment of tax would arise only in the former case. Penalty is a deterrent measure to prevent evasion of tax and when there was no tax payable, there could not be any such evasion so as to provide a scope for levying any penalty. In the present case, only the loss has been reduced and it cannot be said that the assessee had suppressed any income which would have attracted liability to tax. The question of imposition of penalty, therefore, did not arise. Thus, on the facts and in the circumstances of the case, the Appellate Tribunal has acted rightly in law in holding that the provisions of the Explanation to section 271(1)(c) will not be attracted to the present case. The word "income" occurring in clause (c) and (iii) of section 271(1) of the Act refers to positive income only and that no penalty could be levied against the assessee." The aforesaid judgment of Punjab and Haryana High Court in Commissioner of Income Tax Vs. Prithipal Singh and Co. (supra) was impugned by the Commissioner of Income Tax before the Hon’ble Supreme Court of India by way of Special Leave Petition. The Hon’ble Supreme Court was pleased to dismiss the said S.L.P. as reported in 249 ITR 670.(S.C.). Mr. Mehta submitted that the decision in Comissioner of Income Tax vs Prithipal Singh & Co.squarely applies to the present case. -15- 7. Mr.Mehta also took us through the judgments reported in 46 ITR 452 (Allahabad) (Mohd.Atiq Vs.Income Tax Officer); 132 ITR 21 (Kerala) (P.Krishna Bhatta Vs.Income Tax Officer and others); and 100 ITR 17 (Andhra Pradesh) (K.P.Narayanappa Setty and Co. Vs. Commissioner of Income Tax) wherein it is held that though no time limit may have been prescribed by I.T.Act imposing penalty, the penalty should be imposed within a reasonable time and that penalty levied after the delay of 14/16 years without any valid reason/explanation is invalid. Mr. Mehta submitted that in the present case penalty is levied on the assessee after about 16 years from the date of filing of the first asssessment orders without any valid reason/explanation and the same is therefore not valid. 8. We have considered the facts and circumstances of the case and also the case law cited by Mr. Mehta. In the present case in the reassessment for the A.Y.1966-67 an amount of Rs.50,000/- was added as income of the assessee through undisclosed sources. Similarly, in the reassessment for the A.Y.1967-68 the amount of Rs.1,25,000/- was treated as income of the assessee from undisclosed sources. The assessee at no point of time has admitted that the income treated by the authorities for -16- A.Y.1966-67 and A.Y.1967-68 as income from undisclosed sources is concealed income. The Ratio laid down by the Division Bench of this Court in the case of Commissioner of Income Tax, Poona Vs. Bhimji Bhanjee and Co. (supra), therefore, squarely applies to the facts of the instant case and we do not find any hesitation in coming to the conclusion that the Income Tax Authorities who have assessed the income of the assessee for A.Y.1966-67 and A.Y.1967-68 under section 68 of the I.T.Act ought not to have levied any penalty under sec.271(1)(c) of the I.T.Act, 1961. 9. Again it is clear that by an order dated 24th April, 1982, the Income Tax Officer has computed the income of the assessee for A.Y. 1967-68 as negative/loss income of Rs.4,64,301/- The Income Tax Officer thereafter added an amount of Rs.1,25,000/- as income of the assessee from undisclosed sources and thereafter computed its total income as negative/loss income of RS. 3,39,301/-. The Income Tax officer therefore finally assessed the assessee for A.Y.1967-68 at the loss figure amounting to Rs. 3,39,301/-. In view thereof, the decision of the Division Bench of Punjab and Haryana High Court in Commissioner of Income Tax Vs. Prithipal Singh and Co. (supra) to the effect that the word "income" occurring in clause (c) and -17- (iii) of section 271(1) of the Act refers to positive income only and that no penalty could be levied against the assessee who is assessed finally at a loss figure squarely applies to the present case. In fact, as set out earlier even the Hon’ble Supreme Court has declined to interfere with the said decision of the Punjab and Haryana High Court and dismissed the S.L.P. filed against the said judgment by the Commissioner of Income Tax, Punjab and Haryana. In view thereof, we hold that in the present case no penalty could be levied under section 271(1)(c) of the Income Tax Act, 1961 and the question of application of explanation to section 271(1)(c) of I.T.Act does not arise. 10. On the issue pertaining to the delay in levying the penalty on the assessee, as set out hereinabove, the original assessment for A.Y. 1966-67 was completed on 23rd July, 1971 and for A.Y. 1967-68 on 30th March, 1972. The said orders were set aside and reassessment proceedings started after almost 10 years. The assessee has through out taken a consistent stand that the contention of the tax authorities, that the person/s who had given the loans to the assessee had made a statement that they have in fact not given any loan is incorrect and was made before some other I.T.O.in some other proceedings -18- The assessee has consistently contended that the alleged statements were made behind the back of the assessee and the assessee was never given any opportunity to confront them and/or cross examine them. No particulars of any such statement/s are on record. In any event, the said original assessment was set aside and the Income Tax Authorities themselves at the time of reassessment of the assessee’s income pertaining to A.Y.1967-68 and A.Y.1968-69 once again tried to summon the parties who had given loans to the assessee. The assessing authority surely did not expect all the parties to come forward with records which by that time were about 15/16 years old. Despite that four of the parties who had given loans to the assessee in the A.Y.1966-67 and whose loans were treated as bogus loans in the original assessment came forward with the documents and satisfied the Taxing Authorities about the genuineness of the loans given by them to the assessee. Even for the A.Y. 1967-68 only two parties who had given loans to the assessee aggregating to Rs.75,000/- were disbelieved on the ground of them not being produced before the Tax authorities. The penalty proceedings were admittedly initiated in the year 1985. We are, therefore, of the view that no penalty could have been levied on the assessee pertaining to the A.Y.1966-67 and A.Y.1967-68 on the ground that the assessee could not -19- produce the depositors after a lapse of 17 years from the date of the loan received