Citation Codes

Equivalent Citations

citation codes

Case Number

Income-tax Reference No. 39 of 1965

Attorney(S)

For the Appellant: K. Sreenivasan, K.S. Paripoornan, Advocates.
For the Respondent: C.T. Peter, Advocate.

Judges

M.S Menon, C.J
P. Govindan Nair, J.

Acts

section 66(1) of the Indian Income-tax Act, 1922.
section 28(1)(c)

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Smart Summary

Structured Summary of the Opinion delivered by Govindan Nair, J.

Factual and Procedural Background

This matter is a reference under section 66(1) of the Indian Income-tax Act, 1922, from the Income-tax Appellate Tribunal, Madras Bench. The question referred was whether, on the facts and in the circumstances of the case, the levy of penalty on the assessee under section 28(1)(c) of the Act was justified.

For the assessment year 1952-53 the central factual dispute concerned certain discrepancies in the assessee's stock accounts for consignments of pepper. The Income-tax Officer treated the discrepancies as indicative of unreported income and made an addition of Rs. 87,400 to the income returned by the assessee; the Appellate Assistant Commissioner confirmed that addition on appeal. The Tribunal, however, concluded that the accounts need not be rejected and, while noting "specific discrepancies," reduced the addition to Rs. 30,000.

Following assessment, a notice under section 28(3) was issued to the assessee proposing penalty for concealment or deliberate furnishing of inaccurate particulars. The Income-tax Officer imposed penalty; the Appellate Assistant Commissioner set the penalty aside on appeal; the Tribunal in turn restored the Income-tax Officer's penalty order (these are annexures "B", "C" and "D" respectively to the statement of case). The High Court was asked to determine whether the Tribunal's order (annexure "D") imposing penalty was justified.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the levy of penalty on the assessee under section 28(1)(c) of the Income-tax Act, 1922, was justified?
Whether the Tribunal's restoration of the penalty order (annexure "D") can be justified on the facts and circumstances referred to in the case?

Arguments of the Parties

Assessee's Arguments

The discrepancies in the stock records arose from clerical mistakes — specifically a conversion error by a clerk who took a bag weight as 165 lbs (5 thulams) instead of the correct 137 lbs, and other possible clerical errors in casting of the stock book.
The shortage claimed was not excessive having regard to the total handling of pepper; the department did not point to any omission of sale.
Given the large turnover disclosed by the assessee, there could not be any ulterior motive behind the discrepancies.
Sale proceeds in respect of the two consignments had been fully accounted for in the accounts.
The Tribunal in the quantum appeal had observed that the books maintained were sufficient for proving profit; the Appellate Assistant Commissioner accepted the assessee's explanation for the discrepancies.

Department's Arguments (as presented in the opinion)

The Income-tax Officer did not accept the assessee's clerical-error explanation and considered other factors, concluding that the discrepancies evidenced under-reporting of income; accordingly he made an addition of Rs. 87,400.
After the department's inquiry began, the assessee presented the clerical-mistake theory (implying that prior to inquiry the facts were not fully disclosed), from which the department inferred deliberate concealment or furnishing of inaccurate particulars.
The Tribunal ultimately found the assessee's explanation unacceptable and held that the assessee had "deliberately refrained from placing all the facts before the Income-tax Officer," justifying the penalty under section 28(1)(c).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Maney and Co. v. Commissioner of Income-tax [1963] 47 I.T.R. 434	Proceedings under section 28 are penal in nature; onus of proof is on the department and the degree of proof required is that of a criminal prosecution (mere preponderance of probability will not suffice).	The court relied on this authority to confirm the penal character of proceedings under section 28 and the elevated standard of proof required from the department.
Ramankutty v. Income-tax Officer, Alleppey	Similar view that proceedings under section 28 are penal and require a stringent standard of proof (as expressed by one of the judges of the present bench in an earlier judgment).	The court noted that one of the judges had taken a similar position in this earlier judgment, using it to support the proposition about the nature of section 28 proceedings.
The Commissioner Of Income-Tax, Ahmedabad v. Messrs Gokuldas Harivallabhdas, Nadiad [1958] 34 I.T.R. 98	Chief Justice Chagla had expressed a strong view on the penal nature and burden of proof in proceedings under section 28; the Supreme Court declined leave to appeal in that case.	The court cited this decision as a significant authority supporting the stringent standard of proof and penal character of the proceedings under section 28.
P. K. Kalasami Nadar v. Commissioner of Income-tax [1962] 46 I.T.R. 1056	Represents a differing view (Madras High Court) on the matter (the opinion notes divergence of views among High Courts).	The court referred to this case when noting that there is not uniformity of opinion across High Courts, but did not adopt its reasoning.
Commissioner of Income-tax v. L. H. Vora [1965] 56 I.T.R. 126	After reviewing various decisions, Chief Justice Shelat held that mere falsity of an explanation given in assessment proceedings would not necessarily lead to the inference that the disputed amount represented income; additional material is required from which the Income-tax Officer can be satisfied that the assessee is guilty under section 28.	The court relied particularly on this decision to support the proposition that beyond falsity of an explanation, some positive additional material is required to justify a penalty under section 28(1)(c).

Court's Reasoning and Analysis

The court proceeded in the following analytical steps, grounded in the material and authorities cited in the opinion:

Characterisation of the proceedings: The court affirmed that proceedings under section 28 are penal in nature and that the department bears the onus of proof, requiring a degree of proof akin to a criminal prosecution (citing Maney and Co. and other authorities).
Factual findings of lower fora: The Tribunal (annexure "A") had accepted the accounts generally and did not reject them under the proviso to section 13, but recognised "specific discrepancies" in stock records and framed the quantum question accordingly. It concluded an addition of Rs. 30,000 was appropriate after considering valuation and arithmetical errors.
Course of events on penalty: The Income-tax Officer did not accept the assessee's explanation for the discrepancies, made an addition of Rs. 87,400, and initiated penalty proceedings under section 28(3). The Income-tax Officer imposed penalty; the Appellate Assistant Commissioner cancelled the penalty; the Tribunal restored the penalty in annexure "D".
Examination of annexure "D": The court extracted and considered the Tribunal's reasoning in annexure "D." The Tribunal's central approach was to reject the assessee's explanation as not acceptable and to infer that the assessee "deliberately refrained from placing all the facts before the Income-tax Officer," and that the explanation was advanced only after inquiry commenced.
Application of legal standard: The court emphasised, relying on L. H. Vora and related authorities, that mere falsity or unacceptability of an explanation is not by itself sufficient to sustain a penalty under section 28(1)(c). There must be "some additional material" or a positive element of proof from which it can be inferred that the disputed amount represented income — for example, material showing that goods were with the assessee in kind or had been converted into cash during the accounting period.
Assessment of the record: The court found no such positive material in the record. The approach of the Tribunal had been primarily to test the acceptability of the explanation rather than to identify independent material proving that the discrepancies represented unreported income. The Appellate Assistant Commissioner had found the assessee's explanation acceptable, and the court observed that the Tribunal's mere rejection of the explanation did not satisfy the higher standard required to impose penalty.
Conclusion from analysis: On the basis that the requisite positive evidence that would permit an inference of deliberate concealment was absent, the court held that the Tribunal's penalty order could not be justified.

Holding and Implications

QUESTION ANSWERED IN THE NEGATIVE.

Holding: The court answered the referred question in the negative — in other words, the levy of penalty under section 28(1)(c) as restored by the Tribunal in annexure "D" was not justified on the facts and material before the authorities.

Direct implications for the parties:

The decision is in favour of the assessee and against the department on the specific reference made under section 66(1).
The court directed that the parties shall bear their respective costs in this income-tax reference case.

Broader implications: The opinion reiterates and applies established principles (as reviewed in authorities cited) that proceedings under section 28 are penal and demand a high standard of proof; it emphasises that mere rejection of an explanation does not suffice — some additional material pointing to concealment or conversion into cash must exist before imposing penalty. The opinion does not assert the creation of a new legal precedent beyond applying and following the authorities discussed.

Question answered in the negative.

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N. Kunhali Haji v. Commissioner Of Income-Tax, Kerala.

The Judgment of the Court was delivered by

Govindan Nair, J.:— This is a reference by the Income-tax Appellate Tribunal, Madras Bench, under section 66(1) of the Indian Income-tax Act, 1922. The question referred is this:

“Whether, on the facts and in the circumstances of the case, the levy of penalty on the assessee under section 28(1)(c) of the Act was justified?”

2. The relevant part of section 28(1)(c) is in these terms:

“If the Income-tax Officer, the Appellate Assistant Commissioner orthe Appellate Tribunal, in the course of any proceedings under this Act, is satisfied that any person—…

he or it may direct that such person shall pay by way of penalty,… in the cases referred to in clauses (b) and (c), in addition to any tax payable by him, a sum not exceeding one and a.half times the amount of the income-tax and super-tax, if any, which would have been avoided if the income as returned by such person had been accepted as the correct income.”

3. For the year of assessment 1952-53, in assessing the petitioner the question arose as to whether the income, profits or gains can be ascertained from the accounts maintained by him and whether any additions should be made to the income returned by the assessee. Dealing with this question, the Income-tax Appellate Tribunal, as is seen from their order which is annexure “A” to the case, came to the conclusion that there is no reason for rejecting the accounts and for applying the proviso to section 13. They, however, expressed the view that certain additions will have to be rtiade on what they termed “to be specific discrepancies” and observed:

“The Income-tax Officer has cited three instances of stock discrepancies in the stock books produced. These discrepancies are indeed real and call for a proper attention in this context.

4. By the above discrepancies, sales have been overshown in the stock account and to that extent the stock shown in the inventory has been reduced. The exact quantity that has to be considered for this purpose and the valuation thereof for purposes of the addition have been the subject-matter of argument before us. It is true there is an arithmetical mistake in the casting of the stock book and any one of these or all of them could have contributed to it. In the manner in which these entries have been specifically made, however, such a contribution cannot be much. The valuation too must be only at the market rate prevailing at about the time of the discrepancy and not the average rate for the year.”

5. They finally came to the conclusion that;

“Having due regard to all the foregoing facts and circumstances, in our opinion, an addition of Rs. 30,000 would meet all the requirements of the case.”

6. In paragraph 4 of the statement of the case, the discrepancies referred to by the Tribunal in their order, annexure “A”, have been stated thus:

“According to the account sales from the consignees the weight of first consignment of 208 bags (seven bags found short in packing) was cds. 42-9 mds. 51bs., and the weight of the other consignment of 72 bags was cds I 11-11 mds. 9 lbs. There was thus a difference of 14 candies and odd. in the stock as between the quantities entered in the stock register and the account sales. The difference between the stock register and the weight as per 1 railway receipt was nearly 12 candies. The value of the above 12 candies of pepper would be about Rs. 43,000.”

7. The assessee had an explanation in regard to these discrepancies. His case was that the clerk had converted 208 bags relating to the first consignment at 5 thulams per bag (165 lbs.) whereas the weight was 137 lbs. as it contained both light and good pepper? The Income-tax Officer did not accept this explanation and taking some other factors also into consideration, he aldded Rs. 87,400 towards the income returned by the assessee and this addition was confirmed by the Appellate Assistant Commissioner in appeal. As mentioned already, the Tribunal for the reasons which they have stated and which we have extracted above, reduced the addition to Rs. 30,000.

8. Thereafter, a notice was issued to the assessee under section 28(3) to show cause why a penalty should not be imposed on the assessee. The assessee contended that he had not concealed the particulars of his income or deliberately furnished inaccurate particulars thereof and tried to explain the discrepancies found on the stock register by putting forward the contention that it was a clerical error and also that the weight of the bag was wrongly taken as 165 lbs., whereas it should have been 137 lbs. This explanation of the assessee has not been accepted and penalty has been imposed by the Income-tax Officer. In appeal, however, the order imposing penalty was set aside by the Appellate Assistant Commissioner and in further appeal, the Tribunal restored the order passed by the Income-tax Officer. The three orders are, respectively, annexures “B”, “C” and “D” to the statement of thp case.

9. The question that arises for determination is whether the order annexure “D”, can be justified on the facts and in the circumstances of the case already referred to.

10. That the proceedings under section 28 are in the nature of a penal proceeeding can no longer be doubted. This court stated in Maney and Co. v. Cdmmissioner of Income-tax [1963] 47 I.T.R 434.:

“The onus of proof is on the department and the degree of proof is that of a criminal prosecution; the mere preponderence of probability will not suffice as in the case of a civil action.”

11. Similar is the view taken by one of us in the judgment in Ramankutty v. Income-tax Officer, Alleppey, and we find that as early as 1958, the same view has been expressed perhaps in stronger terms by Chief Justice Chagla in The Commissioner Of Income-Tax, Ahmedabad v. Messrs Gokuldas Harivallabhdas, Nadiad* [1958] 34 I.T.R 98.. It is significant that this case was sought to be appealed against before the Supreme Court and the Supreme Court declined to grant leave to appeal. It is not as though there is no difference of opinion in regard to this matter. The Madras High Court and the Allahabad High Court,-we are aware, have struck different notes. It seems to us unnecessary to consider these cases in detail, for the matter again came up for consideration before the Gujarat High Court in Commissioner of Income-tax v. L.H Vora [1965] 56 I.T.R 126.. Chief Justice Shelat, after an elaborate review of the various decisions, had particular occasion to consider the view expressed by the Madras High Court in P.K Kalasami Nadar v. Commissioner of Income-tax [1962] 46 I.T.R 1056., and his Lordship came to the conclusion that:

“The proceedings being of a penal nature and the burden being upon the department, it would be but legitimate to say that mere falsity of an explanation given in assessment proceedings would not necessarily lead to the inference that the disputed amount represented income, and that, besides that circumstance, there must be some additional material from which the Income-tax Officer has to satisfy himself whether the assessee was guilty of the charge against him under section 28.”

12. As we read the order of the Tribunal, which is annexure “D”, the only question that they have considered in the order is as to whether the explanation made out by the assessee is acceptable or not and they have come to the conclusion that such an explanation is not acceptable. This, we do not think, would necessarily lead to the conclusion that the assessee had furnished wrongful particulars of his income, or deliberately furnished inaccurate particulars of such income, one of which at least is essential in order to apply section 28(1)(c) under which proceedings had been taken. We may extract in extenso the paragraph in annexure “D” which deals with that question:

“The assessee's learned counsel submitted that the question ultimately.turned on the point of the shortage; that having regard to the total handling of pepper the shortage claimed could not be said to be excessive; that the department had not pointed out to any omission of sale; that having regard to the large turnover disclosed by the assessee, there could not be any ulterior motive behind these discrepancies. It was further submitted that the sale proceeds in respect of these two consignments had been fully accounted for in the accounts. We were also referred to the observations of the Appellate Tribunal in the quantum appeal in regard to the nature of the books maintained and their sufficiency for proving the profit. It Was urged that, in all these circumstances, there was no case for levy of penalty and that the Appellate Assistant Commissioner's order should be upheld.”

13. We see nothing in this excepting the conclusions stated thus:

“It will thus be seen that there is a difference in quantity which has not been accounted for. By putting a higher figure on the credit side, the assessee had under-stated the closing stock… We consider that the assessee had deliberately refrained from placing all the facts before the Income-tax Officer. It was only after the enquiry had started that he came forward with this theory of clerical mistake… Having regard to all the facts, we consider that the penalty order was justified and that the Appellate Assistant Commissioner was not correct in cancelling the same.”

14. These we consider are hardly sufficient to posit that there has been such default on the part of the assessee as contemplated by section 28(1)(c). It is not as though that the discrepancies found in the stock register cannot have any explanation whatever. In fact, the Appellate Assistant Commissionerfound the explanation made by the assessee acceptable. Even otherwise we feel that there must be a positive element of proof in such matters. There must be some material available from which it is possible to draw theinference that either the goods were with the assessee in kind or were converted into cash and thus he had acquired income during the accounting period. Not only there is no such material but the approach has not been on tiose lines. It has not been recognised that this positive element must be established. We, therefore, answer the question that has been referred to us in the negative, that is, in favour of the assessee and against the department. We direct the parties to bear their costs in this income-tax referred case.

Question answered in the negative.

N. Kunhali Haji v. Commissioner Of Income-Tax, Kerala.

Structured Summary of the Opinion delivered by Govindan Nair, J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments

Department's Arguments (as presented in the opinion)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

N. Kunhali Haji v. Commissioner Of Income-Tax, Kerala.

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