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Rajaram And Co. v. Commissioner Of Income-Tax.
Factual and Procedural Background
The assessee (a registered firm) filed a return of income on June 30, 1969, for the assessment year 1969-70 declaring total income of Rs. 54,453. An assessment under section 143(3) of the Income-tax Act, 1961, was made on February 24, 1972, assessing income at Rs. 1,66,660. That order was set aside by the Appellate Assistant Commissioner on September 13, 1972, with directions to pass an order on the registration issue and to frame a fresh assessment.
A fresh assessment was framed on January 19, 1973, again assessing total income at Rs. 1,66,660, and penalty proceedings were initiated under section 271(1)(c) of the Act for furnishing inaccurate particulars of income and concealing income. The Appellate Assistant Commissioner reduced certain additions and made other adjustments in favour of the assessee.
The Inspecting Assistant Commissioner, after evaluating the evidence on record (the assessee did not produce fresh evidence when given the opportunity), found that numerous sales shown by the assessee were not genuine. Specific factual findings included many sales on single days to large numbers of parties at differing rates, identical quantities of silver sold in thousands of transactions, concentrated sales on only 110 days with none on other days, and the assessee's failure to produce buyers or addresses to corroborate the cash memos. The Inspecting Assistant Commissioner concluded that the Explanation to section 271(1)(c) applied and imposed a penalty of Rs. 65,210 by order dated March 11, 1975.
The assessee challenged the penalty before the Tribunal. The Tribunal upheld the Inspecting Assistant Commissioner’s findings and penalty, concluding that the assessee failed to discharge the burden imposed by the Explanation to section 271(1)(c). The Tribunal then referred the following question to this Court under section 256(1) of the Act.
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was liable to penalty under the provisions of section 271(1)(c) read with the Explanation thereto of the Income-tax Act, 1961 ?"
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was liable to penalty under the provisions of section 271(1)(c) read with the Explanation thereto of the Income-tax Act, 1961?
Arguments of the Parties
Assessee's Arguments
- The Income-tax Officer had not recorded the requisite satisfaction before issuance of the notice under section 271(1)(c). The assessment order dated January 19, 1973, purportedly referred to section 271(1)(a) (instead of (c)), and the assessee relied on Supreme Court decisions (CIT v. S. V. Angidi Chettiar and D. M. Manasvi v. CIT) for the proposition that satisfaction must be reached during the assessment proceedings (i.e., before conclusion of the assessment) and that jurisdiction to levy penalty under section 271(1)(c) depends on such satisfaction.
- It was contended that the Inspecting Assistant Commissioner had relied solely on reasons given in the original order of assessment without giving independent findings. The assessee relied on the decision in CIT v. Khoday Eswarsa and Sons for the proposition that penalty cannot be imposed solely on the basis of reasons recorded in the assessment order.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. S. V. Angidi Chettiar [1962] 44 ITR 739 | Proposition that the satisfaction necessary for initiating penalty proceedings must be arrived at by the assessing authority during the course of the assessment proceedings. | The Court observed that although the assessee relied on this decision, the facts showed the Income-tax Officer had formed satisfaction during proceedings (including incorporation by reference of earlier reasons and giving opportunities to produce evidence). Therefore, this precedent did not assist the assessee in the present case. |
| D. M. Manasvi v. CIT [1972] 86 ITR 557 | Same proposition as above: the requirement that satisfaction be reached during the assessment proceedings for penalty jurisdiction to exist. | The Court held that the material on record demonstrated that satisfaction was arrived at during the assessment proceedings here, so this decision could not rescue the assessee. |
| CIT v. Khoday Eswarsa and Sons [1972] 83 ITR 369 | Proposition that penalty should not be levied solely on the basis of reasons recorded in the original assessment order; the penalty authority must apply independent mind. | The Court examined the Inspecting Assistant Commissioner’s order and found he had independently evaluated the evidence on record, given his own findings (including explicit paragraphs stating independent appraisal), and thus Khoday Eswarsa was not applicable to negate the penalty in this case. |
Court's Reasoning and Analysis
The Court proceeded through the following analytical steps, drawing solely on material in the opinion:
- Assessment history and incorporation of earlier reasons: The Court noted that the January 19, 1973 assessment order incorporated the reasons given in the earlier order dated February 24, 1972 by reference, and that the Income-tax Officer had, by letter dated November 28, 1972, informed the assessee that old proceedings were intended to be adopted for computing income and framing the fresh order. A notice under section 143(2) had been sent on December 28, 1972 requesting the assessee to produce evidence, which the assessee did not comply with.
- On the question of whether requisite satisfaction was reached before issuing the penalty notice: The Court observed that although the assessment order may have typographical error referring to clause (a) rather than clause (c), the notice was in fact issued under section 271(1)(c), and the assessee never contended before the Inspecting Assistant Commissioner or the Tribunal that the Income-tax Officer had not reached satisfaction because of the typographical error. Taking into account the incorporation by reference of earlier reasons and the procedural steps taken (communication of discrepancies, opportunities to produce evidence), the Inspecting Assistant Commissioner and the Tribunal reasonably concluded that the Income-tax Officer had formed the necessary satisfaction during assessment proceedings.
- On the contention that penalty was imposed solely on the basis of the assessment reasons (Khoday Eswarsa): The Court examined the Inspecting Assistant Commissioner’s order and found that he had explicitly stated no fresh evidence had been produced, that he had evaluated the evidence on record, detailed the strange nature of transactions, recorded that the assessee had not adduced evidence to substantiate genuineness, and had, by independent appraisal, found sales not genuine and that the assessee had concealed income. The Tribunal concurred with these independent findings. Therefore, the authority did not merely rely on the assessment reasons but had applied independent mind and reached findings.
- Substantive factual analysis supporting penalty: The Inspecting Assistant Commissioner’s findings (which the Tribunal accepted) included a detailed factual picture: very many sales clustered on particular days to numerous parties at varying rates; identical quantities sold in thousands of transactions; absence of corroborating buyers or addresses; and concentration of sales on only certain days of the year. Given these peculiarities and the assessee's failure to produce evidence to explain them, the Explanation to section 271(1)(c) was applicable and sustained the imposition of penalty.
- Conclusion on precedents relied upon by the assessee: The Court concluded that the cited precedents requiring satisfaction during assessment proceedings did not assist the assessee because, on the record, the requisite satisfaction had been arrived at. Likewise, the precedent that punishment cannot be based solely on assessment reasons (Khoday Eswarsa) did not help because the Inspecting Assistant Commissioner had independently evaluated and formed conclusions.
Holding and Implications
Holding: The reference is answered in the affirmative and against the assessee; the decision of the Tribunal upholding the penalty imposed under section 271(1)(c) is sustained.
Direct implications for the parties:
- The penalty of Rs. 65,210 imposed by the Inspecting Assistant Commissioner under section 271(1)(c) is held to be valid and is upheld by the Court through its affirmation of the Tribunal's decision.
- The reference is disposed of with no order as to costs.
Broader implications:
The opinion restricts itself to the facts of the case and the record before the authorities. It does not purport to lay down any new legal principle beyond applying existing authorities to the facts; accordingly, no new precedent is stated to be set by this decision beyond affirming that (i) satisfaction may be found from reasons incorporated by reference and the procedural record, and (ii) a penalty authority must apply independent mind (which was done here) and may lawfully impose penalty where the assessee fails to discharge the burden imposed by the Explanation to section 271(1)(c).
1. The assessee, a registered firm, filed its return of income on June 30, 1969, for the assessment year 1969-70 declaring a total income of Rs. 54,453. In the assessment order dated February 24, 1972, the income of the assessee was assessed at Rs. 1,66,660 under section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as "the said Act"). That order was set aside by the Appellate Assistant Commissioner on September 13, 1972, with a direction to pass the order on the registration issue and then to frame a fresh assessment. Thereafter a fresh assessment was made on January 19, 1973, by the Income-tax Officer who assessed the total income at Rs. 1,66,660 and initiated action under section 271(1)(c) of the said Act for furnishing in accurate particulars of income and concealing the income. The Appellate Assistant Commissioner granted certain reliefs to the assessee by reducing the addition of Rs. 12,180 to the book results in Bombay-set account to Rs. 10,000, deleting an addition of Rs. 15,502 relating to certain borrowings and reducing the rate of gross profit from 2.5% to 2% in the Vapi-set account.
2. The Inspecting Assistant Commissioner, rejecting the contentions raised by the assessee, found that the sales as shown by the assessee were not genuine and, considering the facts and circumstances of the case narrated in his order, came to the conclusion that the assessee had furnished inaccurate particulars of income and had concealed the income exigible to tax. The assessee, on being given an opportunity by the Inspecting Assistants Commissioner, did not produce any fresh evidence and the Inspecting Assistant Commissioner, therefore evaluated the evidence which was on record before the Income-tax Officer. It was found that, on a single day i.e., on February 6, 1978, silver was sold at the rate of Rs. 530 per kg. to 92 parties as indicated in cash memos Nos. 1175 to 1266 and at the rate of Rs. 550 per kg. to 66 parties as indicated in cash memos Nos. 1267 to 1332 It was found that the fact 158 parties converged on the shop of the assessee on the same way, on March 18, 1968, 19 parties were sold silver at Rs. 500 per kg. as mentioned in cash memos Nos. 2657 to 2686 and, on the same day, 59 parties were sold silver at the rate of Rs. 520 per kg. as shown in cash memos Nos. 2687 to 2745. These 78 parties went to the shop of the assessee to buy silver of the same quantity and value and the assessee sold them at two different rates. It was found that though ample opportunity was given, the assessee was not able to produce any of the parties or indicate the addresses of such parties and it has not shown that the transactions in fact took place at the rates stated in the cash memos. It was found by the authorities that the assessee had tried to show that sales had taken place at particular rates mentioned in the cash memos and had failed to establish that these were genuine rates. It was also found that it was strange and surprising that each one of 6,570 sales was for an identical quantity of silver and for sums varying between Rs. 900 to Rs. 1,000. Moreover, there were sales only on 110 days in a year and, on the rest of the days, there were no sales whatsoever. The Inspecting Assistant Commissioner, on consideration of the entire evidence on record, found that the sales at the rates as shown in the cash memos were not genuine. It was also found that the matter was clearly covered by the Explanation to section 271(1)(c) of the said Act.
3. The order of the Inspecting Assistant Commissioner dated March 11, 1975, by which he imposed a penalty of Rs. 65,210 upon the assessee under section 271(1)(c) of the said Act was challenged by the assessee before the Tribunal and the Tribunal, concurring with the finding of the Inspecting Assistant Commissioner, came to the conclusion that the Inspecting Assistant Commissioner was fully justified in imposing the penalty. The Tribunal found that this was not a case where book results were rejected for want of primary data or an estimate was adopted without any basis. The Tribunal held that since it was found by the Income-tax Officer that the sales were made to different parties on a single day at varying rates and that, in some cases, identical quantities were sold to different parties at varying rates, having regard to the peculiar circumstances of the case, it was incumbent upon the assessee to come forth with an explanation about the transaction to the satisfaction of the Income-tax Officer. The Tribunal found that the assessee was able to discharge its burden which lay upon it under the Explanation to section 271(1)(c) of the said Act and the penal provisions were rightly invoked in this case.
4. In the above background, the Tribunal has, at the assessee's instance referred the 1following question for the opinion of this court under section 256(1) of the Act :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was liable to penalty under the provisions of section 271(1)(c) read with the Explanation thereto of the Income-tax Act, 1961 ?"
5. It was contended on behalf of the assessee that, no satisfaction was recorded by the Income-tax Officer before the issuance of the notice under section 271(1)(c) of the said Act. It was pointed out that, in the assessment order dated January 19, 1973, the provision of section 271(1)(a) was written and merely because the notice which was issued thereafter was under section 271(1)(c), it could not be said that the Income-tax Officer had arrived at the requisite satisfaction before the issuance of the notice. Reliance was placed on the decisions of the Supreme Court in CIT v. S. V. Angidi Chettiar [1962] 44 ITR 739 and D. M. Manasvi v. CIT [1972] 86 ITR 557, in support of the proposition that the satisfaction was required to be arrived at by the Income-tax Officer before the conclusion of the proceeding under the Act, i.e., the course of the assessment proceeding and the jurisdiction under section 271(1)(c) would depend upon the satisfaction of the concerned authority and not on the fact that the notice under section 271(1)(c) was subsequently issued. There can be no dispute about the proposition that the satisfaction of the Income-tax Officer in the course of the assessment proceedings regarding concealment of income or furnishing of false particulars would constitute the basis and foundation of the proceedings for levy of penalty under section 271(1)(c) of the said Act. Admittedly, the assessee had filed its return on June 30, 1969, and, therefore, there was no question of any late filing of return and it is obvious that reference to clause (a) of section 271(1) of the Income-tax Officer dated January 19, 1973, by which, while framing the assessment, he simultaneously directed notice to be issued was only a typographical error, if at all clause (a) is typed in the original order. Admittedly, the notice was issued pursuant to the said order under section 271(1)(c) of the said Act and it has never been contended thereafter by the assessee in response to that notice before the Inspection Assistant Commissioner or even before the Tribunal that the Income-tax Officer had not arrived at his satisfaction, because clause (a) was typed instead of clause (c) while directing penalty proceedings to be initiated against the assessee. In out view the assessee cannot, at this stage, attempt to gain advantage over an obvious typing error if at all it was there in the original order. The initiation was obviously for penalty under the provisions of section 271(1)(c) and that is how it had been understood by all concerned including the assessee until now. Merely because an obvious typing error had occurred in the order of the Income-tax Officer, it cannot be said that he may not have arrived at the requisite satisfaction. It is clear from the assessment order dated January 19, 1973, that the Income-tax Officer had, by his letter dated November 28, 1972, informed the assessee that the old proceedings were intended to be adopted for computing the income and farming the fresh assessment order. A notice under section 143(2) of the said Act was sent to the assessee on December 28, 1972. It appears that though the assessee was requested to produce necessary evidence, it did not comply with the notice and, ultimately, the Income-tax Officer, for reasons discussed in the earlier assessment order dated February 24, 1972, assessed the income of the assessee at Rs. 1,66,655. It is, thus, clear that the reasons which were given in the order dated February 24, 1972, were made part of the said order dated January 19, 1973 by incorporating the same by reference and, therefore, the order dated January 19, 1973, can not be read in oscillation while examining the question whether the requisite satisfaction was arrived at by the Income-tax Officer during the proceedings. Taking into account all the relevant facts and circumstances of the matter and the order passed by the Income-tax Officer dated January 19, 1973, which incorporated the reasons given in the earlier order dated February 24, 1972, by reference, the Inspecting Assistant Commissioner found that the Income-tax Officer had arrived at the requisite satisfaction during the course of the assessment proceedings and had issued notice under section 271(1)(c) of the Act. The Tribunal found that the Income-tax Officer had brought to the notice of the assessee by his letter dated December 28, 1972, discrepancies which had remained unexplained and several opportunities were given to the assessee to establish the genuineness of the transaction in question. The assessee did not, however, adduce any evidence to show as to how the peculiar and strange transactions had occurred. The material on record clearly indicates that the requisite satisfaction was arrived at by the Income-tax Officer before initiating the proceedings under section 271(1)(c) of the said Act and, therefore, the above decisions cited on behalf of the assessee cannot come to its rescue.
6. It was then contended by learned counsel appearing for the assessee that the Inspecting Assistant Commissioner had relied solely on the reasons given by the Income-tax Officer without giving independent findings in the matter. He relied upon the decision of the Supreme Court in CIT v. Khoday Eswarsa and Sons [1972] 83 ITR 369, in support of the proposition that penalty cannot be levied solely on the basis of the reasons given in the original order of assessment. On going through the order of the Inspecting Assistant Commissioner, it is clear that he has evaluated the entire evidence which was on record before the Income-tax Officer and given his won findings in the matter. In paragraph 10 of his order, he has stated that no fresh evidence was produced before him and, therefore, he was required to evaluate the evidence on record for the purpose of considering whether penalty can be levied. Thereafter, he has considered the strange nature of the transactions in detail and, in paragraph 15 of his order, it has been stated the assessee had not adduced any evidence before the Income-tax Officer or the Appellate Assistant Commissioner to substantiate its claim that the sales were genuine. It was then stated that, by independent appraisal of the facts of the case, the Inspecting Assistant Commissioner found that the sales were not genuine. It is also recorded in paragraph 16 that, considering the facts and circumstances of the case narrated earlier in the order, he was satisfied that the assessee had furnished inaccurate particulars of income and had concealed income exigible to tax. The Tribunal concurred with the findings of the Inspecting Assistant Commissioner on the relevant aspects and upheld his decision. Since the Inspecting Assistant Commissioner has clearly applied his mind independently and given his own findings after evaluating the evidence, the decision in Khoday Eswarsa's case [1972] 83 ITR 369 (SC) cannot help the assessee.
7. Under the above circumstances, we find that the decision of the Tribunal, upholding the order of penalty imposed by the Inspecting Assistant Commissioner on the assessee is based on the material on record and is in accordance with law, calling for no interference by this court. The question referred to us by the Tribunal is, therefore, answered in the affirmative and against the assessee.
8. Reference stands disposed of, accordingly, with no order as to costs.
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