Nainu Mal Het Chand v. Commissioner Of Income-Tax

R.K Agrawal, J.:— The Income-tax Appellate Tribunal, Allahabad, has referred the following question of law under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for opinion to this court:

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in confirming the penalty under section 271(1)(c) read with Explanation 1 thereto?”

2. The reference relates to the assessment year 1989-90 in respect of the penalty imposed under section 271(1)(c) of the Act. Briefly stated, the facts giving rise to the present reference are as follows:

The applicant has been assessed to income-tax during the assessment year 1989-90 as a registered firm. During the course of the assessment proceedings, three cash credit entries of Rs. 26,000 appearing in the name of Master Manish Matlani, Rs. 78,000 appearing in the name of Master Hitesh Matlani and Rs. 61,000 appearing in the name of Master Lucky Matlani were noticed by the assessing authority. He proposed addition of the aforesaid amounts under section 68 of the Act. The applicant gave the explanation that all the three depositors who were minors have been regularly assessed to tax with the Income-tax Officer, Ward-II(VH), Kanpur, and were maintaining savings bank account with the Indian Overseas Bank, Swarup Nagar Branch, Kanpur. The applicability of the provisions of section 68 of the Act was also challenged on the ground that the income had already been assessed in the hands of the minors and that the deposits have come from their savings bank account through cheques. The genuineness of the cash credit as well as the capacity to give money/loan stands established. The assessing authority after examining the explanation and the documents filed by the applicant in the assessment proceedings came to the conclusion that all the three minors are grand sons of Sri Nainu Mal Matlani who is a partner of the firm and are closely related to the partners. The father of Master Manish Matlani, Sri Ram Chandra Matlani is working as manager on a salary of Rs. 1,500 p.m in M/s Naini Mal & Sons, which is a sister concern of the applicant whereas Sri Om Prakash Matlani, the father of Master Hitesh Matlani and Sri Kanhaiya Lal Matlani, the father of Master Lucky Matlani, are working in the applicant-firm on a monthly salary of Rs. 1,500. He further found that Master Lucky Matlani had a credit balance of Rs. 27,000 in the applicant-firm. He had made a deposit of Rs. 2,000 on April 2, 1988, Rs. 58,000 on June 21, 1988, and Rs. 1,000 on July 1, 1988, and the entire amount was squared up on July 28, 1988. The source of deposit of Rs. 61,000 made during the year was explained as gifts received by the minor on various occasions. However, no proof regarding receipt of gifts was furnished. The only explanation offered was that the minor had shown the gift as his income in his return filed for the assessment years 1986-87, 1987-88 and 1988-89. Sri Kanhaiya Lal, the father of Master Lucky Matlani, who was examined under section 131 of the Act, had deposed in his statement that in the return of income of Master Lucky Matlani filed for the assessment year 1988-89, Rs. 87,800 was shown as cash in hand which was deposited in the savings bank account maintained with the Indian Overseas Bank, Swarup Nagar Branch, Kanpur, from where Rs. 58,000 was withdrawn and deposited with the applicant-firm. On being questioned to explain the source of the income of the minor declared in the income-tax return, Sri Kanhaiya Lal had stated that the gifts were the source of the income for which he had no proof and every year the source of income remained the same, i.e, the gifts. On being further questioned as to how the gifts received in each year were not deposited in the bank account immediately or soon thereafter they were received, Sri Kanhaiya Lal had no explanation to offer. The Income-tax Officer examined the savings bank account pass book of Master Lucky Matlani and found that the amount of Rs. 87,800 was deposited in cash on June 21, 1988, and on the same day, the money was deposited with the firm. He came to the conclusion that it is nothing but unaccounted profit of the firm which has come to it in the garb of gifts and subsequently as deposits in the name of the minors. So far as the deposit made by Master Manish Matlani is concerned, his account with the applicant-firm showed opening credit balance of Rs. 8,000 and further credit of Rs. 25,000 on June 21, 1988, and Rs. 1,000 on July 1, 1988, and the entire amount was squared up on October 1, 1988. The explanation furnished was the same as in the case of Master Lucky Matlani, Sri Ram Chandra Matlani, the father of Master Manish Matlani, was examined under section 131 of the Act and he gave the similar explanation. The copy of the savings bank account of Master Manish Matlani was also examined by the Income-tax Officer who found that Rs. 25,000 was deposited on June 21, 1988, in the bank which is the same date on which the amount was credited by the applicant in its books of account. He came to the conclusion that the firm's profit had been routed through the minor's bank account. In respect of the deposits appearing in the name of Master Hitesh Matlani, the position was no different. The assessing authority added a sum of Rs. 1,65,000 towards unexplained cash credits under section 68 of the Act. The additions have been upheld up to the stage of the Tribunal. The Income-tax Officer while passing the assessment order, also directed for initiation of penalty proceedings under section 271(1)(c) of the Act for concealment of particulars of its income. After considering the explanation given by the applicant, he imposed a sum of Rs. 86,950 as penalty. The appeal preferred by the applicant has been rejected by the Commissioner of Income-tax (Appeals), Kan-pur, which order has been affirmed by the Tribunal.

3. We have heard Sri K.N Kumar, learned counsel for the applicant, and Sri A.N Mahajan, learned standing counsel appearing for the Revenue.

4. Learned counsel for the applicant submitted that before initiating penalty proceedings under section 271(1)(c) of the Act, the Income-tax Officer had not recorded his satisfaction and, therefore, the entire penalty proceeding stands vitiated. He further submitted that the minor depositors had three independent source of income and the money credited in the books of account of the applicant really belonged to them. They were income-tax payees and had been assessed to income-tax on such income whereunder the amounts received by them as gifts have been treated to be their income and merely because in the quantum proceedings the amount had been added under section 68 of the Act at the hands of the applicant, the explanation given by the applicant cannot be treated to be false or unsubstantiated. Thus, no penalty under section 271(1)(c) of the Act could have been imposed. He further submitted that the onus of proving the source of these deposits have been discharged. In support of his aforesaid plea, he has relied upon the following decisions:

(i) Commissioner Of Income-Tax v. Dajibhai Kanjibhai., [1991] 189 ITR 41 (Bom);

(ii) CIT v. Eastern Commercial Enterprises, [1994] 210 ITR 103 (Cal);

(iii) Roopchand Manoj Kumar v. CIT, [1999] 235 ITR 461 (Gauhati);

(iv) National Textiles v. CIT, [2001] 249 ITR 125 (Guj);

(v) Commissioner Of Income-Tax, Delhi-Iii v. Ram Commercial Enterprises Ltd, [2000] 246 ITR 568 (Delhi);

(vi) Diwan Enterprises v. Commissioner Of Income Tax., [2000] 246 ITR 571 (Delhi); and

(vii) Commissioner Of Income-Tax v. Munish Iron Store, [2003] 263 ITR 484 (P&H).

5. On the other hand, Sri A.N Mahajan, learned standing counsel, submitted that the deposits made by the three minors with the applicant have been upheld up to the stage of the Tribunal to be not genuine deposits and have been added as unexplained cash credit under section 68 of the Act. The explanation offered by the applicant had been disbelieved by all the authorities. According to him, in the assessment order itself the assessing authority had mentioned for initiating penalty proceedings under section 271(1)(c) of the Act for concealment of particulars of income which itself establishes that the Income-tax Officer was satisfied that in the present case penalty proceedings for concealment of particulars of income has to be initiated. According to him, no particular form of recording satisfaction has been mentioned under the Act and, therefore, recording of the fact to initiate penalty proceedings during the course of the assessment proceedings would itself mean that the assessing authority was satisfied that the applicant had concealed the particulars of his income and penalty proceedings have to be initiated. He further submitted that the explanation offered by the applicant had rightly been disbelieved by all the authorities including the Tribunal on valid and cogent reasons. He submitted that Explanation 1 to section 271(1)(c) of the Act clearly applies in the present case as the explanation offered by the applicant has been found to be false by all the authorities. Thus, the penalty has rightly been imposed. He has relied upon a decision of the apex court in the case of D.M Manasvi v. CIT, [1972] 86 ITR 557.

6. We have given our anxious consideration to the various pleas raised by learned counsel for the parties.

7. It is not in dispute that the deposits of Rs. 1,65,000 appearing in the name of three minors have been added as unexplained cash credit under section 68 of the Act. The explanation given by the applicant has been found to be false by all the authorities including the Tribunal. In the penalty proceedings, similar explanation was given, which had been disbelieved and penalty of Rs. 86,950 under section 271(1)(c) of the Act has been imposed. The Tribunal while dealing with explanation has recorded a finding of fact that the applicant has not been able to substantiate the explanation to the effect that the depositors have received gifts in any of the previous years or had any independent source of income; the applicant has not been able to prove that this explanation was bona fide; there was no documentary evidence in support of the assessee's contention; even the name of the person from whom the alleged gifts were received, were not disclosed to the Department; the minor depositors were intimately related to the partners of the assessee-firm; the explanation was baseless and the provisions of section 271(1)(c) of the Act were attracted in the present case.

8. Learned counsel for the applicant had not been able to show that the conclusions arrived at by the Tribunal suffer from any legal infirmity. It is based on appreciation of evidence and material on record. The Tribunal has not committed any illegality while recording the aforesaid findings and the conclusions it drew.

9. So far as the question of recording the satisfaction by the Income-tax Officer is concerned, we find the that apex court in the case of D.M Manasvi, [1972] 86 ITR 557 has held that merely because notices for imposition of penalty were issued subsequent to making of the assessment order, would not show that there was no satisfaction of the Income-tax Officer during the assessment proceedings that the assessee had concealed the particulars of his income or has furnished incorrect particulars of such income. In paragraph 8 of the report, the apex court has held as follows (page 561):

“The fact that notices were issued subsequent to the making of the assessment orders would not, in our opinion, show that there was no satisfaction of the Income-tax Officer during the assessment proceedings that the assessee had concealed the particulars of his income or had furnished incorrect particulars of such income. What is contemplated by clause (1) of section 271 is that the Income-tax Officer or the Appellate Assistant Commissioner should have been satisfied in the course of proceedings under the Act regarding matters mentioned in the clauses of that sub-section. It is not, however, essential that notice to the person proceeded against should have also been issued during the course of the assessment proceedings. Satisfaction in the very nature of things precedes the issue of notice and it would not be correct to equate the satisfaction of the Income-tax Officer or the Appellate Assistant Commissioner with the actual issue of notice. The issue of notice is a consequence of the satisfaction of the Income-tax Officer or the Appellate Assistant Commissioner and it would, in our opinion, be sufficient compliance with the provisions of the statute if the Income-tax Officer or the Appellate Assistant Commissioner is satisfied about the matters referred to in clauses (a) to (c) of sub-section (1) of section 271 during the course of proceedings under the Act even though notice to the person proceeded against in pursuance of that satisfaction is issued subsequently. We may in this context refer to a decision of five judges Bench of this court in the case of CIT v. S.V Angidi Chettiar, [1962] 44 ITR 739 Shah J., speaking for the court, while dealing with section 28 of the Indian Income-tax Act, 1922, observed:

‘The power to impose penalty under section 28 depends upon the satisfaction of the Income-tax Officer in the course of proceedings under the Act; it cannot be exercised if he is not satisfied about the existence of conditions specified in clause (a), (b) or (c) before the proceedings are concluded. The proceeding to levy penalty has, however, not to be commenced by the Income-tax Officer before the completion of the assessment proceedings by the Income-tax Officer. Satisfaction before conclusion of the proceeding under the Act, and not the issue of a notice or initiation of any step for imposing penalty is a condition for the exercise of the jurisdiction.”

10. In the case of Dajibhai Kanjibhai, [1991] 189 ITR 41, one of the questions that came up for consideration before the Bombay High Court was as to whether the finding of the Tribunal that the primary ingredient for initiating penalty proceedings was absent in the case as the Income-tax Officer did not record his satisfaction during the course of the assessment proceedings is correct in law? In the last paragraph of the assessment order, the Income-tax Officer has stated as follows (page 43):

“Assessed under section 144 of the Act. Issue notice of demand. Issue notice under sections 271(1)(a), 273(b) and 271(1)(b) of the Act charge interest under section 217. Give concession in tax as per the Taxation Concessions Order, 1964.”

11. Though section 271(1)(c) of the Act was not mentioned as one of the sections in respect of which the Income-tax Officer was satisfied, the Inspecting Assistant Commissioner to whom the reference was made, imposed penalty of Rs. 3,00,000 under section 271(1)(c) of the Act. In the light of the aforesaid facts, the Bombay High Court has held as follows (page 43):

“… the legal position in this regard is now well-settled. In view of the Supreme Court's decision in CIT v. S.V Angidi Chettiar, [1962] 44 ITR 739, power to impose penalty under section 28 of the old Act corresponding to section 271 of the new Act depends upon the satisfaction of the Income-tax Officer in the course of the proceedings under the Act. It cannot be exercised if he is not satisfied and has not recorded his satisfaction about the existence of the conditions specified in clauses (a), (b) and (c) before the proceedings are concluded. There is no evidence on record to show that the Income-tax Officer, in this case, was satisfied in the course of the assessment proceedings. Therefore, we must hold that the penal provisions of section 271(1)(c) were not attracted in this case.”

12. The aforesaid decision is clearly distinguishable for the reason that in the present case during the course of the assessment proceeding the Income-tax Officer has mentioned for initiating penalty proceedings under section 271(1)(c) of the Act for concealment of the particulars of income.

13. In the case of Eastern Commercial Enterprises, [1994] 210 ITR 103, the Calcutta High Court has held that it is trite law that cross-examination is the sine qua non of due process of taking evidence and no adverse inference can be drawn against a party unless the party is put on notice of the case made out against him and he must be supplied the contents of all such evidence, both oral and documentary, so that he can prepare to meet the case against him which necessarily also postulates that he should cross-examine the witness hostile to him. In the present case, we find that all the witnesses examined under section 131 of the Act were fathers of the minor depositors and were closely related with the applicant. In any event, the applicant had not raised any grievance nor had made any request for cross-examination. The aforesaid decision is, therefore, of no help to the applicant.

14. In the case of Roopchand Manoj Kumar, [1999] 235 ITR 461, the Gauhati High Court has held where the gift amount does not run into four or five figures, generally no record or list is maintained and this is not a case of receipt of gifts on one occasion, like marriage, etc., and were purportedly received on various occasions, each year and for 12-14 years, the creditworthiness in respect of a sum of Rs. 9,000 each by the two creditors stands established. The facts of the present case are entirely different. Here the gifts run into five figures. The list of the donors have not been produced nor any explanation had been given. Even the recipients of the gifts, i.e, the three minors, had voluntarily disclosed the same as their income. The amount which had been advanced, was deposited in cash on the same day with the bank and later given as loan by cheques. The authorities have disbelieved the explanation and, therefore, the creditworthiness of the depositors stands disproved.

15. In the case of National Textiles, [2001] 249 ITR 125, the Gujarat High Court has held that the explanation is to the effect that where in respect of any fact or material for purposes of his assessment, an assessee offers an explanation which is found by the Assessing Officer or the Deputy Commissioner of Income-tax (Appeals) to be false or where the assessee is unable to substantiate his explanation, then the amount added to his income shall be deemed to represent his concealed income; the newly introduced Explanation 1 considerably reduces, but does not altogether remove the Department's onus to prove concealment in assessed income based on unexplained cash credit or unexplained investment and like; in order to justify the levy of penalty, two factors must co-exist, (i) there must be some material or circumstances leading to the reasonable conclusion that the amount does represent the assessee's income; it is not enough for the purpose of penalty that the amount has been assessed as income, and (ii) the circumstances must show that there was animus, i.e, conscious concealment or act of furnishing of inaccurate particulars on the part of the assessee; the explanation has no bearing on factor No. 1 but it has a bearing only on factor No. 2; the explanation does not make the assessment order conclusive evidence that the amount assessed was in fact the income of the assessee; no penalty can be imposed if the facts and circumstances are equally consistent with the hypothesis that the amount does not represent concealed income as with the hypothesis that it does; if an assessee gives an explanation which is unproved but not disproved, i.e, it is not accepted but circumstances do not lead to the reasonable and positive inference that the assessee's case is false, the explanation cannot help the Department because there will be no material to show that the amount in question was the income of the assessee; alternatively, treating the explanation as dealing with both the ingredients (i) and (ii) above, where the circumstances do not lead to the reasonable and positive inference that the assessee's explanation is false, the assessee must be held to have proved that there was no mens rea or guilty mind on his part; even in this view of the matter, the explanation alone cannot justify levy of penalty and absence of proof acceptable to the Department cannot be equated with fraud or wilful default.

16. In the case of Ram Commercial Enterprises Ltd., [2000] 246 ITR 568, the Delhi High Court has held that a bare reading of the provisions of section 271 and the law laid down by the Supreme Court makes it clear that it is the assessing authority which has to form its own opinion and record its satisfaction before initiating the penalty proceedings; merely because the penalty proceedings have been initiated, it cannot be assumed that such a satisfaction was arrived at in the absence of the same being spelt out by the order of the assessing authority; even, at the risk of repetition we would like to state that the assessment order does not record the satisfaction as warranted by section 271 for initiating the penalty proceedings. The aforesaid decision has been followed subsequently by the Delhi High Court in the case of Diwan Enterprises, [2000] 246 ITR 571.

17. In the case of Munish Iron Store, [2003] 263 ITR 484, the Punjab and Haryana High Court has approved the order of the Tribunal wherein the Tribunal has given the following reasoning for cancelling the penalty imposed under section 271(1)(c) of the Act (page 486):

“It is clear from the above that not a word has been written about concealment of income. The Assessing Officer quietly accepted the revised return and the income disclosed therein. He did not record how and why the revised return was submitted. The statement of the partner on pages 14-16 of the paper book, Shri Ramesh Kumar was recorded and in that statement, he did explain the reasons which led to filing of the revised return. Learned counsel for the assessee contended that those reasons were impliedly accepted by the Assessing Officer. Looking at the assessment order, one cannot challenge the above assertion of learned counsel for the assessee. At any rate, the satisfaction above the concealment of income or furnishing of inaccurate particulars of income to assume jurisdiction to initiate and levy penalty is clearly not recorded as enjoined by law. The above jurisdictional defect in our view cannot be cured. Accordingly, we hold that penalty imposed is not valid and jurisdiction to impose the same was illegally assumed without recording a proper satisfaction. Penalty imposed is cancelled for the above reasons.”

18. The aforesaid decision is of no help to the applicant inasmuch as in the present case we find that in the assessment order the assessing authority had recorded a clear finding that the profits of the firm had been diverted through the deposits in question and a case of concealment has been made out.

19. So far as the two decisions of the Delhi High Court are concerned, we find that under the provisions of the Act, the Income-tax Officer is not required to record his satisfaction in a particular manner or reduce it in writing. It can be gathered from the assessment order itself. In D.M Manasvi, [1972] 86 ITR 557, the apex court has clearly held that the Income-tax Officer should be satisfied during the course of the assessment proceedings that the assessee had concealed his particulars of income or has furnished inaccurate particulars of such income. The satisfaction can be gathered from the assessment order. In the present case, we find that the Income-tax Officer had materiah before him for being satisfied that the applicant has concealed the particulars of his income and, therefore, penalty proceedings have rightly been initiated. We are, therefore, with great respect unable to persuade ourselves to follow the view taken by the Delhi High Court in the aforesaid two cases. In view of the foregoing discussions, we answer the question referred to us in the affirmative, i.e, in favour of the Revenue and against the assessee. There shall be no order as to costs.