Additional Commissioner Of Income-Tax, Punjab, J. & K., Etc. v. Sadiq Ali & Bros.

1. This reference which originally arose out of two cases before the Tribunal was consolidated into one and, therefore, one reference has been made by the Tribunal to this court. The reference has been made by the Tribunal at the instance of the Additional Commissioner of Income-tax, Patiala, and arises out of the order of the Tribunal dated June 11, 1971, passed in I.T.As Nos. 459 and 460 of 1969-70.

2. The facts giving rise to this reference may be summarized as follows. The assessee, Messrs. Sadiq Ali & Bros., is a registered firm with its headquarters at Srinagar and branch at Bombay and deals in Kashmir Arts goods. The firm consists of nine partners. The assessment relates to the accounting years ending March 31, 1964, and March 31, 1965, i.e., assessment years 1964-65 and 1965-66. For these years the assessee filed its return declaring income of Rs. 27,293 for the assessment year 1964-65 and Rs. 54,595 for the assessment year 1965-66. In connection with the return for the assessment year 1964-65, the Income-tax Officer made additions of Rs. 10,985 and Rs. 10,585 in the trading accounts of the head office and the Bombay branch of the firm respectively. These additions were made with the tacit consent and agreement of the assessee. The Income-tax Officer also made a similar agreed addition of Rs. 40,000 out of unexplained cash credits of Rs. 50,000 found credited in the accounts of the partners in the books of the firm. Thus the total income was determined at Rs. 96,630 for the assessment year 1964-65, while for the assessment year 1965-66 an agreed addition of Rs. 16,823 was made to the income declared from the Bombay branch and a further sum of Rs. 15,000 as credits was added in the names of Khan Muzaffar Ali, Maulvi Amjad Ali and Maulvi Iftikhar. Thus the total income for the year was determined at Rs, 91,970 by order of the Income-tax Commissioner.

3. After completing the assessment proceedings for both the years, the Income-tax Officer initiated penalty proceedings under Section 271 of the Income-tax Act (hereinafter to be referred to as "the Act"), and since the penalty which was proposed to be imposed exceeded Rs. 1,000, the case of the assessee was referred to the Inspecting Assistant Commissioner who levied penalties of Rs. 15,000 and Rs. 7,000 for the assessment years 1964-65 and 1965-66, respectively. Aggrieved by the order of the Inspecting Assistant Commissioner, the assessee filed an appeal before the Tribunal for deleting the penalties levied by the Commissioner.

4. The contention of the assessee before the Tribunal was that it was a case of an agreed addition resulting from unproved deposits and no culpable or wilful negligence on the part of the assessee was involved and, therefore, the penalties were not exigible under the provisions of the Act. This contention appears to have found favour with the Tribunal who observed as follows;

"After carefully looking at the facts and the terms of the letters and notings on the order sheet, we are of the opinion that it is a case of unproved cash deposits where the rule laid down by the Supreme Court in Anwar Ali's case would apply. The penalties are accordingly deleted."

5. The order of the Tribunal is marked as annexure "E" and has been carefully perused by us.

6. As the penalties were deleted by the Tribunal, the applicant, namely, the Additional Commissioner of Income-tax, Patiala, approached the Tribunal for making a reference to this court, and, accordingly, the Tribunal has made this reference and has referred the following question of law for our decision :

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in deleting the penalties levied under Section 271(1)(c) for the assessment years 1964-65 and 1965-66."

7. The learned standing counsel for the department submitted before us that the view taken by the Inspecting Assistant Commissioner was correct, and since the assessee had deliberately concealed the amounts which it voluntarily agreed to be added to its income by the Income-tax Officer, therefore, proceedings under Section 271 of the Act were fully justified and the Inspecting Assistant Commissioner was correct in imposing the penalties. Mr. S. Grover, appearing for the assessee, however, submitted that it was neither a case of culpable or wilful omission nor deliberate concealment but a case of an unproved deposit and the mere fact that the explanation given by the assessee was not acceptable to the income-tax department was not sufficient to lead to the irresistible inference that there was a deliberate concealment on the part of the assessee. We are inclined to agree with the contention raised by the learned counsel for the assessee.

8. Section 271(1) of the Act runs thus :

"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) has without reasonable cause failed to furnish the return of total income which he was required to furnish under Sub-section (1) of Section 139 or by notice given under sub-section (2) of Section 139 or Section 148 or has without reasonable cause failed to furnish it within the time allowed and in the manner required by Sub-section (1) of Section 139 or by such notice, as the case may be........"

9. From a perusal of Section 271(1) it is manifest that before this section can apply the authority concerned must be satisfied that the assessee has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income. Although the section does not require mens rea, yet as the provisions are of a purely penal nature, some amount of culpable negligence or wilful omission on the part of the assessee must be necessary before penalty can be levied. The imposition of penalty works serious injustice to the assessee and, therefore, the provision must be strictly construed and before penalty can be imposed there must be a finding that there was a deliberate concealment of the income and its particulars by the assessee.

10. In the instant case the assessee's conduct falls within the second part of Section 27l(1)(c) and not the first part, that is to say, the assessee is alleged to have deliberately furnished inaccurate particulars of its income. As the assessee had filed its income-tax return and had already shown these amounts in his books of account, it cannot be said that the assessee had concealed the particulars of its income so as to bring its case within the four corners of the first part of Section 271(1)(c). Similarly, the word "satisfied" appearing in Section 271(1) which qualifies both the clauses of Section 271 is a very strong term and suggests that the satisfaction must be based on cogent and proper materials. We are fortified in this view by a decision of the Supreme Court in Commissioner Of Income Tax, West Bengal v. Anwar Ali ., [1970] 76 I.T.R. 696, 700 ; [1971] 1 S.C.R. 446 (S.C.), wherein their Lordships observed as follows :

"It is true that penalty proceedings under Section 28 are included in the expression 'assessment' and the true nature of penalty has been held to be additional tax. But one of the principal objects in enacting Section 28 is to provide a deterrent against recurrence of default on the part of the assessee. The section is penal in the sense that its consequences are intended to be an effective deterrent which will put a stop to practices which the legislature considers to be against the public interest."

11. Although this decision was given with respect to the interpretation of Section 28 of the old Act, yet the provisions of Section 271 of the Act are exactly the same as those of section 28 of the old act.

12. In view of the observations of the Supreme Court it is clear to us that unless there are sufficient materials to raise an inference of deliberate concealment or culpable negligence on the part of the assessee, he cannot be liable to penalty.

13. In the instant case the Tribunal after a consideration of the entire facts and circumstances had come to a clear finding in its judgment that the present case was not one of concealment but one of unproved cash deposits. The mere fact that the explanation given by the assessee was not proved to the satisfaction of the income-tax department or, was not correct could not by itself be sufficient to invoke the penalty under the provisions of section 271. In the instant case, however, it is obvious that a part of the explanation submitted by the assessee was in fact accepted by the income-tax department which clearly proves the bona fides of the assessee.

14. In Gumani Ram Sin Ram v. Commissioner of Income-tax, [1972] 85 I.T.R. 67, 70 (Punj.) it was held that penalty could not be levied merely because the cash deposits were surrendered by the assessee. In this connection, a Division Bench of the Punjab High Court in a somewhat similar situation observed as follows :

"In our opinion, this conclusion . is not inevitable. There may be hundred reasons for the assessee to surrender this amount irrespective of the fact whether it was his income or not and it was incumbent, in view of the observations of the Supreme Court in Anwar Ali's case, for the Income-

tax Officer to find on evidence that the amount of Rs. 12,000 represented the income of the assessee. Therefore, we are clearly of the view that the requirements of Section 27l(1)(c) have not been satisfied so as to bring the case of the assessee within the same."

15. To the same effect is another decision of the Supreme Court in Commissioner of Income-tax v. Bharat Engineering and Construction Co., [1972] 83 I.T.R. 187, 189 ; (S.C.) wherein their Lordships of the Supreme Court refused to hold that the assessee would be liable to pay penalty merely because Ms explanation regarding cash deposits was false. In this connection their Lordships observed as follows :

"Hence, it is reasonable to assume that those cash credit entries are capital receipts though for one reason or other the assessee had not come out with the true story as regards the person from whom it got those amounts. It is true that in the absence of satisfactory explanation from the assessee the Income-tax Officer may assume that cash credit entries in its books represent income from undisclosed sources. But what inference should be drawn from the facts proved is a question of fact and the Tribunal's finding on that question is final."

16. The Supreme Court in this case further held that an inference drawn by the Tribunal on the proved facts was a question of fact and could not be interfered with on reference. The High Court could interfere only if there was a question of law.

17. In the instant case also the learned Tribunal on the facts of the present case has drawn a clear inference that it was a case of unproved cash deposit and this being a finding of fact no question of law arises for our decision.

18. In Basant Lal Om Prakash v. Commissioner of Income-tax, [1972] 89 I.T.R. 356, 361 (Punj.) a Division Bench of the Punjab and Haryana High Court observed as follows:

"Under Section 28 of the Act, there is no statutory obligation on the income-tax authorities to impose a penalty in every case. A case for the imposition of penalty has to be found on the material on the record and it is essentially a question of fact whether in a certain case penalty is called for or not. The Tribunal gave valid reasons in support of its order cancelling the order of penalty imposed by the Income-tax Officer and upheld by the Appellate Assistant Commissioner."

19. In view of the decisions referred to above and having regard to the well-reasoned findings of fact arrived at by the Tribunal we do not find any ground to differ from the view taken by the Tribunal and we accordingly hold that no error of law is involved in the judgment of the Tribunal. The decision of the Tribunal, therefore, deleting the penalty was perfectly correct in law.

20. The reference is accordingly answered in the affirmative. In the peculiar circumstances of this case, there will be no order as to costs.

D.D. Thakur, J.

21. I agree.