ANANTHARAM VEERASINGAIAH & CO.

COMMISSIONER OF INCOME TAX, A.P.

April 15, 1980

[N. L. UNTWALIA, R. S. PATHAK AND E. S. VENKATARAMIAH, JJ.]

II'

Income Tax Act, 1961, Section 271(1)(c), scope of Penalty Proceedings irt quasi judicial and Burden of proof is on Revenue-Secret Profits or undisclosed income and their actual availability for application by the ass.esSfe-Power of the High Court in a Tax Reference case, explained.

The appellant, assessee is an Abkari contractor. It -filed a return of its income for the assessm1e-nt year 1959-60, disclosing a total turnover of Rs. 10,92,132/- and an income of Rs. 7,704/-. The Income Tax Officer did not accept the correctness of the return.

He found that on 12th December, l95'i and 16th January, 1958 the excess of expenditure over the disclosed available cash was Rs. 17,726/- and Rs. 65,066 respectively. He also noticed seve-· rat deposits, totalling Rs. 28,200, entered in the names of certain Sendhi shop~ keeP'ers. The Income Tax Officer rejected the account books of the asscssee and his explanations for the discrepancies thereof and estimated the assessee's income on an overall figure of Rs. 5,00,018. In appeal before. the. Appellate Assistant Commissioner and thereafter before the Income Tax Appellate Tribunal the assessee succeeded in getting the assessed income reduced to Rs. 1,30,00Ct in addition to the books profits. Penalty proceedings were taken against the assessee and the case, was referred to the Inspecting Assistant Commissioner, who imposed a penalty of Rs. 75,000 under s. 27l(l)(c) of the Income Tax Act, 1961. On appeal by the assessee, the Appellate Tribunal held that there was no positive material to establish that the cash deposits represented con~ cealed inccime.

In regard to the cash deficits, the' Appellate Tn"bunar noticed that for the assessment year 1957-58 an addition of Rs. 2,00,000 had been made to the book profits, and it observed that some part of that amount could havebeen ploughed back into tho business. It held that an amount of Rs. 90,000' representing unledgerised cash credits of that year could be said to have been introduced in that year. Allowing the appeal, the. Appellate Tribunal set aside the penalty order made by the Inspecting Assistant Commissioner.

On a reference to the High Court, at the instance of the Commfssioner of Income Tax, the High Court held that the Appellate Tribunal was not justi~ ficd, in holding that no -penalty was 1eviable. Hence the appeal by special leave.

Directing the Appellate Tribunal to take up the appeal under s:ection 260(1)'

i ' ,

of the Income Tax Act, the Court >--

HELD : An order imp-0sing a penalty is the result of quasi criminal proceedings. The burden of proof Ji; es on the Revenue to establish that the disputed amount represents income and that the assessee has consciously concealed the particulars of his income or has deliberately furnished inaccurate particulars. It is for the Revenue to prove these ingredients before a penalty caru be imposed.

[622B-C]

VEERASINGAIAH V. C.l.T 619

Since the burden of proof in a penalty proceeding varies from that in vol ved in an assessment procedings a finding in an assessment proceeding that a particular receipt is income cannot automatically be .adopted as a finding to that effect in the penalty proceeding. In the penalty proceeding the taxing authority is bound to consider the matter afresh on the material before it and, in the light of th{i burden to prove resting on the Revenue, to ascertain whether a particular amount is a revenue receipt. No doubt, the fact that the assessment order contained a finding that the disputed amount represents income constitutes good evidence in the penalty proceeding but the finding in the assessment proceeding cannot be regarded as conclusive for the purposes of the penalty proceeding.

Before a penalty can be imposed the entirety of the circumstances must be taken into account and must point to the conclusion that the disputed amount represents income and that the assessee has consciously concealed particulars of his income. or deliberately furnished ioaccurate particulars. The mere falsity o.f the explanation given by the asse.ssee is insufficient without there being in additiun cogent material Or evidence from which the ncessary conclusion attracting a penalty could be drawn.

(622C-G]

Commissioner of Income Tax, W&st Bengal and Anr. v. Anwar Ali [ 1970] 76 J.T.R. 696; Commiioner of lncome Tax, Madras v. Khoday Eswarsa and Sons, [1972] 83 I.T.R. 369; applied.

2. Vlhen an 'intangible' addition is made to the book profits during an assessment proceeding, it is on the basis that the amount represented by that addition constitutes the undisclosed income of the assessee. That income although commonly described as 'intangible', is as much a part of his real income as that disclosed by his account books. It has the same concrete. existence. It could be available to the assessee as the book profits could be. [623A-B]

3. Secret profits or undisclosed incon1e of an assessee earned in an earlier asses.sment year may constitl'lte a fund, even though concealed, from which the assessee may draw subsequently for meeting expenditure or introducing amounts in his account books. Any part of that fund need not necessarily be regarded as the source of unexplained expenditure incurred or of cash credits recorded during a subsequent assessment year.

The mere availability of such a fund cannot, in all cases, imply that the assessee has not earned further secret profits during the relevant assessn1ent year It is' a matter for consideration by the taxing authority, in each case, whether the unexplained cash d.eficits and the cash credits can be reasonably attributed to a pre-existing fund of concealed profits or they are reasonably exPJained by reference to concealed. income earned in that very year.

In each case the true nature of the cash deficit and the cash credit must be ascertained from an overall consideration of the particular facts and circumstances of the caSie.

Evidence may exist to Show that reliance cannot be placed completely on the availability of a previously earned undisclosed. income. A number of circumstances of vital significance may point to the conclusion that the cash d.eficit or cash credit cannot reasonably be related to the amount covered by the intangibte: addition but must be regarded as pointing to the receipt of undisclosed inrome earned during the assessment year under consideration. It is open to -the Re1'enue to rely on all the circuDtances pointing to that conclusion. What those seVeral circurmtanoes can be is difficult to enumerate and indeed, from the nature of the enquiry, it is alm0st impossible

to do so.

However, they must be such as can lead to the firm conclusion that

A th: assessee has concealed the particulars of his income or has deliberately furnished inaccurate particulars.

[64.JCH, 624AJ

Lagadapn Subha Ramiah v.

Commissioner of Income Tax, Madras, [1956] 30 I.T.R. 593; S. Kuppuswami Mudaliar v. Commissioner of Income Tax, Madras, [1964] 51 I.T.R. 757; approved.

ti In .an income tax reference, a High Court should co'nfine itself to deciding the question of law referred to it on facts found by the Appellate Tribunal. It is the Ap-pelJate Tribunal which has been entrusted with the authority to find facts. [624D-E]

( CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2592 of 1972.

C Appeal by Special Leave from the Judgment and Order dated 9-11-1971 of the Andhra Pradesh High Court in Case Referred No. 4 of 1970. .

S. T. Desai, T. A. Ramachandran, Mrs. !. Ramachandran and M. N. Tandon for the Appellant.

D S. C. Manchanda, Miss A. Subashini and D. B. Ahuja for the

Respondent.

The Judgment of the Court was delivered by

PATHAK, J. This appeal, by special leave, is directed against a judgment of the Andhra Pradesh High Court, concerning the scope of s. 271(1)(c) of the Income Tax Act, 1961.

The assessee is an Abkari contractor.

It filed a return of its income for the assessment year 1959-60, disclosing a total turnover of Rs. 10,92,132 and an income of Rs. 7,704. The Income Tax Officer did not accept the correctness of the return. He found tlmt on 12th December, 1957 and 16th January 1958 the excess of expenditure over the disclosed available cash as Rs. 17, 720 and Rs. 650,66 respectively. He also noticed several deposits, totalling Rs. 28,200, entered in the names of certain Sendhi shop-keeper;.

The assessee's explanation that the excess "expenditure was met from amounts deposited with him by some shop-keepers but not entered in his books was not accepted. The alternative explanation that expenditure incurred earlier had possibly been recorded later was also rejected.

In regard to the cash deposits of Rs. 28,200 the assessee explained that they represented amounts deposited with it as seeurity.

That explanation was rejected insofar as deposits totalling Rs. 21,000 were concerned.

The Income Tax , Officer rejected the account books of the assessee and estimated the assessee's income on an overall figure of Rs. 5,00,018. In appeal before the Appellate Assistant Commissioner and thereafter before the Income Tax

VEERASINGAIAR V. C.I.T. (Pathak, J.) 621

Appellate Tribunal, .the assessee succeeded in getting the assessed income reduced to Rs. 1,30,000 in addition to the book profits.

Penalty proceeding were taken against the assessee and the case was referred to the Inspecting Assistant Commissioner.

The assessee reiterated the explanation which it had offered in the assessment proceedings.

Predictably, the Inspecting Assistant Commissioner rejected the explanation and held that the items of cash deficit and cash deposits represented concealed income resulting from the suppressed yield and low selling rates mentioned in the books. He observed that the assessee had c:oncealed the particulars of his income and furnished inaccurate of it, and therefore imposed a penalty of Rs. 75,000 under s.271(1)(c) of the Income Tax Act, 1961. On

appeai by the assessee, the Appellate Tribunal held that there was no positive material to establish that the cash deposits represented concealed income.

In regard to the cash deficits, the Appellate Tribunal noticed that for the assessment year 1957-58 an addition of Rs. 2,00,000 had been made to the book profits and it observed that some part of that amount could have been ploughed back into the business. It held that an amount of Rs. 90,000 representing un!edgerised cash credits of that year cO\Jld be said to have been introduced in this year.

Allowing the appeal, the Appellate Tribunal set aside the penaty order made by the Inspecting Assistant Conunissioner.

At tbe instance of the Commissioner of Income Tax, the following E question was referred to the High Court:-

"Whether 011 the facts and in the circumstances of the case, the Tribunal is justified in holding that no penalty is leviable ?"

The High Court held that the Appellate Tribunal was not justified p in holding that no penalty W3.s leviable.

In this appeal, it is nrged by learned counsel for the assessee that the High Court erred in interfering with a finding of fact, that the penalty proceedi'ngs being quasi-criminal the bnrden of proof lay on the Revenue to establish that a penalty was attracted and that the intangible addition of Rs. 2,00,000 represented real income and the Appelfate Tribunal was right in considering that an amount of Rs. 90,000 was available to cover. the cash deficits.

Section 271(1) (c) of the Income Tax Act, 1961 provides:-

"271(1). If the Income Tax Officer or the Appellate Assistant Commissioner in the course of any proceedings under this Act is satisfied that any person-

( a) * • * •

(b) • * * *

(c) has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income he may direct that such person shall pay by way of penalty,

" This is the provision as it stood at the relevant time, It is now settled law that an order impoing a penalty is the result of quasicriminal proceeding and that the burden lies on the Revenue to establ.ish that the disputed amount represents income and that the assessee has consciously concealed the particulars of his income or has deliberately furnished inaccurate particulars.

Commissioner of Income Tax, West Bengal and Another v. Anwar Ali.(!) It is for the Revenue to prove those ingredients before a penalty can be imposed.

Since the burden of proof in a penalty proceeding varies from that involved in an assessment proceeding, a finding in an assessment proceeding that a particular receipt is income cannot automatically be D, adopted as a finding to that effect in the penalty proceeding. In the penalty proceeding the taxing authority is bound to consider the matter afresh on the material before it and, in the light of the burden to prove resting on the Revenue, to ascertain whether a particular amount is a revenue receipt.

No doubt, the fact that the assessment order

contains a finding that the disputed amount represents income constitutes good evidence in the penalty proceeding but the finding in the assessment proceeding cannot be regarded as conclusive for the purposes of the penalty proceeding, That is how the law has been understood by this Court in Anwar Ali (supra), and we believed '!hat to be the law still. It was also laid down that before a penalty

an be imposed the entirety of the circumstan.ces must be taken into account and must point to the conclusion that the disputed amount represents income and that the assessee has conciously concealed particulars of his income or deliberately furnished inaccurate particulars.

The mere falsity of the explanation given by the assessee, it was observed, was insufficient without there being in addition cogent material of evidence from which the necessary conclusion attracting a penalty could be drawn. These principles were reiterated by this Court in Commissioner of Income Tax, Madras v. Khoday Eswarsa and sons, (2) In the present case, the Appellate Tribunal has relied entirely on the basic that an intangible addition of Rs. 2,00,000 had been made •e to the book profits of the assessee for the assessment year 1957-58

(1) (1970) 76 I. T. R. 696,

(2) (1972) 83 I. T. R. 369

VEERASINGAJAH v. C.I.T. (Pathak, J.) 623

and it inferred that an amount of Rs. 90,000 was available for being

put to use in the year with which we are concerned. Now it can hardly be denied that when an "intangible' additio"n is made to the book profits during an assessment proceeding, it is on the basis that the amount represented by that addition constitutes the undisclosed income of the assessee That income, although commonly described as "intangible", is as much a part of his real income as that disclosed by his account books. It has the same concrete existence. It could be available to the assessee as the book profits could be. In Lagadapati Subha Ramiah v. Commissioner of Income-tax, Madras(!) the Andhra Pradesh High Court adverted to this aspect of secret profits and their actual availability for application by the assessee.

That view was affirmed by the Madras High Court in S. Kuppuswami Mudliar v. Commissioner of Income-Tax, Madras.(2 )

There can be no escape from the proposition that the secret profits or undisclosed income of an assessee earned in an earlier assessment year may constitute a rnd, even though concealed, from which the assessee may draw sufficient for meeting expenditure or introducing amounts in his account books.

But it is quite another thing to say that any part of that fund must necessarily be regarded as the source of unexplained expenditure incurred or of cash credits regarded during a subsequent assessment year. The mere availability of such a fund cannot, in all cases, imply that the assessee has not earned further secret profits during the relevant assessment year.

Neither law nor human experiences guarantees that an assessee who has been dishonest in one assessment year is bound to be honest in a subsequent assessment year. It is a matter for consideration by the taxing authority in each case whether the unexplained cash deficits and the cash credits can be reasonably attributed to a pre-existing fund of concealed profits or they are reasonably explained by reference to concealed income earned in that very year. In each case the true nature of the cash deficit and the cash credit must be ascertained from an overall consideration of the particular facts and circumstances of the case. Evidence may exist to show that reliance cannot be placed completely on the availability of a pre\<iously earned undisclosed income.

A number of circumstances of vital significance may point to the conclusion that the cash deficit or cash credit cannot reasonably be related to the amount covered by the intangible addition but must be regarded as pointing to the receipt of undisclosed

income earned during the assessment year under consideration. It is open to the Revenue to rely on al! the circumstances pointing to

(I) [1956] 30 !.T.R. 593.

(2) [1964] 58 I.T.R. 757.

that conclusion. What those several circumstances can be is di:llicult to enumerate and indeed, from the nature of the enquiry, it is almost impossible to do so.

In the end, they must be such as can lead to the firm conclusion that the assessee has concealed the particulars of his income or has deliberately furnished inaccurate particulars. It is needless to reiterate that in a penalty proceeding the burden remains on the Revenue of proving the existing of material leading to that conclusion.

The Appellate Tribunal erred in law in confining itself to the fact that an intangible addition had been added to the assessee's book profits two years before and that a part of that amount remained available to the assessee thereafter, the High Court is right in departing from that limited approach and in insisting on a consideration of all the relevant facts and circumstances' of the case relied on by the, Revenue for purpose of determining whether the Revenue has succeeded in discharging its burden.

But while considering the legal principles involved in the application of s. 271 (1) (c) the High Court, in our opinion, has erred in entering into the facts of the case and determining in point of fact that the assessee earned income during the relevant previous year and that he ws guilty of 'concealing such income or furnishing inaccurate particulars of it Having found that the legal basis underlying the order of the Appellate Tribunal was not sustainable, the High Court should have limited itself to answering the question raised by the reference in the negative, leaving it to the Appellate Tribunal to take up the appeal again and redetermine 'it in the light of the law laid down by the High Court. It is the Appellate Tribunal which has been entrusted with the authority to find facts.

A High Conrt is confined to deciding the question of law referred to it on facts found by the Appellate Tribunal. That is the kind of order we now propose to make.

Because the findi1ig of the Appellate Tribunal that no penalty leviable rests on an erroneous legal basis, we endorse the opinion of the High Court that the question referred must be answered in the negative, But as the High Court should not have rendered fi'ndings of fact, we vacate the finding of fact reached by the High Court, without expressing any opinion o'n their correctness, leaving it to the Appellate Tribunal in exercise of its duty under s. 260(1) of the Income Tax Act to take up the appeal and to redetermine it conformably to this judgment and in the light of the principle laid down in it.

The appeal is disposed of accordingly. There is no order as to costs-

S.R.

MGIPF-289 SCl/80-2500-6-1-81

Case remitted to Tribunal.