The Judgment of the Court was delivered by
Dipak Kumar Sen, J.:— The material facts in and the proceedings leading up to this reference are, inter alia, that M/s. Atul Kumar Deovrat & Co., the assessee, is a firm constituted under a deed of partnership dated October 29, 1964. The two main partners of the assessee are Ram Saran Kejriwal and Shyam Saran Gupta, who represent their respective Hindu undivided families in the said firm. Several minor children of the said two partners have been admitted to the benefits of the partnership in the assessee-firm.
2. The assessee carries on business, inter alia, as a dealer in shares. On 15th, 20th and 26th April, 1965, the assessee purchased 4,129 shares of Chamurchi Tea Co. Ltd. not quoted in the stpck market at the rate of Rs. 121.20 per share at a cost of Rs. 3,00,435. It also incurred, on account of stamps for the purchases, expenses aggregating to Rs. 3,824 on April 27, 1965. The total investment in the purchase of the said shares came to Rs. 3,04,259.
3. Besides the above, Sushila Devi Kejriwal, the wife of Ram Saran Kejriwal, the partner of the assessee, purchased 500 shares of Chamurchi Tea Co. Ltd. on April 20, 1965. One Baitakhal Tea Co. Ltd., a company controlled by the Kejriwal family, also purchased 500 shares of Chamurchi Tea Co. Ltd. By reason of the aforesaid purchases, the assessee and the members of the Kejriwal family came to hold 5, 129 shares out of the total 10,000 issued shares of Chamurchi Tea Co. Ltd. and thereby came to hold a controlling interest in the said company.
4. After the purchase of the said shares as aforesaid, seven of the existing directors of Chamurchi Tea Co. Ltd. resigned from the board of directors of the latter company during 1965 and in their place, Ram Saran Kejriwal, Shyam Saran Gupta, Nagarmal Kanodia, Narendra Kumar, Mrs. Sushila Devi Kejriwal, Mrs. Mridula Gupta and Somnath Beri, were appointed as directors of Chamurchi Tea Co. Ltd. The new directors all belonged to the Kejriwal group. This change of management was effected on and from May 1, 1965.
5. It is also on record that the head office of Chamurchi Tea Co. Ltd. was shifted to the residence of Kejriwals at Calcutta from its original head office at Jalpaiguri. Nagarmal Kanodia, one of the new directors of Chamurchi Tea Co. Ltd., at the material time, was employed in the firm, Ram Saran, a firm belonging to the Kejriwal family, as an accountant.
6. In the subsequent year, year ending on October 31, 1966, the assessee purchased further 60 shares of Chamurchi Tea Co. Ltd. from four different parties at the rate of Rs. 60 per share in February, 1966, and 7 shares in May, 1966, at the same price.
7. It is on record that, subsequently, during the year ending on October 31, 1966, the assessee sold all its shares except seven of Chamurchi Tea Co. Ltd. through a broker to different members of the Kejriwal family who were all partners of the assessee. 500 of the said shares were sold to the said Baitakhal Tea Co. Ltd. During the year ending on October 31, 1967, 5 shares were sold to the said Nagarmal Kanodia and 2 to Shyamsaran Gupta at rates varying from Rs. 50 to Rs. 80 per share.
8. The assessee was assessed to income-tax for the assessment years 1966-67 and 1967-68, the relevant accounting years ending on October 31, 1965, and October 31, 1966. In its accounts, the assessee revalued its shares of Chamurchi Tea Co. Ltd. on December 31, 1965, at Rs. 100 per share and debited a loss of Rs. 85,349 in its accounts. In the assessment, the assessee claimed deduction of the said amount as revenue loss. In the subsequent assessment year 1967-68, the assessee similarly claimed deduction of a loss of Rs. 1,39,820 from its total income on account of sale of the said shares of Chamurchi Tea Co. Ltd. at a price lower than their purchase price.
9. The Income-tax Officer found on the facts that the assessee had purchased the said shares of Chamurchi Tea Co. Ltd. by way of investment and not for dealing in them and disallowed the claim for deduction of the said sum of Rs. 85,349 as also the stamp expenses Rs. 3,824 as claimed by the assessee by way of loss. The Income-tax Officer initiated penalty proceedings under sections 271 and 273 of the Income-tax Act.
10. Being aggrieved, the assessee preferred an appeal to the Appellate Assistant Commissioner against the said assessment. The Appellate Assistant Commissioner found on facts that the assessee had purchased the shares of Chamurchi Tea Co. Ltd. at nearly their break-up value but had sold the same at much lower price in the next two years when the break-up value was much higher. He found that this had been done only to create a loss. The further 67 shares purchased by the assessee subsequently at the rate of Rs. 60 per share were held to be forced as the assessee by that time had obtained control of Chamurchi Tea Co. Ltd. The Appellate Assistant Commissioner found that the shares of Chamurchi Tea Co. Ltd. were purchased by the assessee solely and exclusively for purposes of investment, in order to have complete control over the Chamurchi Tea Co. Ltd. He confirmed the assessment and dismissed the appeal of the assessee.
11. Thereafter, the Inspecting Assistant Commissioner took up the penalty proceedings initiated by the Income-tax Officer. On the facts, the Inspecting Assistant Commissioner found that in filing its return, the assessee had concealed its income and had consciously furnished inaccurate particulars of income with pre-meditation and calculation. He held that the Explanation to section 271(1)(c) of the Income-tax Act, 1961, was attracted on the facts and the decision of the Supreme Court in the case Commissioner Of Income Tax, West Bengal v. Anwar Ali , [1970] 76 ITR 696 did not apply on the facts. It was noted that the assessee did not produce any evidence in the penalty proceedings which were not before the Income-tax Officer or the Appellate Assistant Commissioner. It was found that the assessee had acquired the majority of shares in Chamurchi Tea Co. Ltd. for the sole purpose of gaining control of the latter company and was guilty of conscious, calculated and pre-meditated concealment of its income and furnishing of inaccurate particulars of such income. The Inspecting Assistant Commissioner imposed a penalty of Rs. 80,000 on the assessee
12. Being aggrieved, the assessee preferred an appeal from the order of the Appellate Assistant Commissioner confirming the assessment for the assessment year 1966-67 as also the order of penalty by the Inspecting Assistant Commissioner.
13. On a consideration of the facts and circumstances of the case and the submissions made on behalf of the assessee, the Tribunal confirmed the assessment order and disallowed deduction of the said Rs. 85,349 and Rs. 3,824 claimed as a loss.
14. In the appeal preferred from the order of penalty passed by the Inspecting Assistant Commissioner, it was reiterated by the assessee before the Tribunal that 67 shares of Chamurchi Tea Co. Ltd. had been purchased by the assessee from outsiders at the rate of Rs. 60 per share in the open market without exercising any influence. The findings of the Appellate Assistant Commissioner that the said shares had been sold to the assessee only because the control of Chamurchi Tea Co. Ltd. had passed on to the Kejriwal group or that the assessee had obtained control of Chamurchi Tea Co. Ltd. were impugned. It was submitted that the assessee held only 4, 196 shares in Chamurchi Tea Co. Ltd. which did not give to the assessee a controlling interest. It was submitted further that sale of the shares of Chamurchi Tea Co. Ltd. by the assessee to the various members of the Kejriwal family subsequently at rates ranging between Rs. 50 to Rs. 80 per share was made because there was a fall in the value of the said shares and that the assessee itself had purchased 67 shares at the rate of Rs. 60 per share in 1966. It was contended that, in the circumstances, the assessee should be held to be a dealer in the said shares and as such the assessee was entitled to revalue the said shares and to sell them in the next assessment year at lower rates.
15. The Tribunal found that the assessee had acquired the shares of Chamurchi Tea Co. Ltd. by way of investment. It was found further as a fact that the assessee did not have any intention to deal in the said shares. After acquisition of the said shares by the assessee, there was a change in the board of directors of Chamurchi Tea Co. Ltd. There was no evidence or claim that the assessee had subsequently converted the said shares as its stock-in-trade. On the other hand, the assessee did not sell the said shares to any outsider or in the market but the said shares were transferred or sold only to the members of the Kejriwal family who were in control of the assessee. The Tribunal found further that the revaluation of the shares of Chamurchi Tea Co. Ltd. at the end of the assessment year 1966-67 was without any basis and such revaluation had no relationship even with the break-up value of the shares which was found to be about Rs. 168.40 per share. There was no material or evidence to show that the assessee was forced to transfer the said shares of Chamurchi Tea Co. Ltd. at extremely reduced prices.
16. The Tribunal came to the conclusion that the assessee had a plan to acquire the controlling interest of Chamurchi Tea Co. Ltd. to implement which the assessee had purchased the said shares. All facts were known to the assessee at the relevant time. The assessee was conscious throughout that it could not claim any loss arising out of revaluation of the said shares thereby reducing its total income. The Tribunal held that the assessee consciously made a wrong claim of Rs. 85,349 and thereby deliberately reduced its income for the assessment year in question. The Tribunal agreed with the Inspecting Assistant Commissioner that the assessee was guilty of concealment under section 271(1)(c) and the Explanation thereto and was liable to suffer penalty. The Tribunal, however, reduced the quantum of penalty from Rs. 80,000 to Rs. 30,000.
17. On an application of the assessee under section 256(2) of the Income-tax Act, 1961, the Tribunal, as directed, has referred the following question as a question of law arising out of its order for the opininon of this court:
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessee was liable to penalty for concealment under section 271(1)(c) of the Income-tax Act, 1961, read with the Explanation thereto for the assessment year 1966-67?”
18. At the hearing, learned advocate for the assessee submitted that it had been found as a fact that the assessee was a dealer in shares. It also held shares in other companies and sold the same in the same assessment year. On the facts, the Tribunal had no ground to come to a conclusion that the assessee in acquiring the shares of Chamurchi Tea Co. Ltd. had acted otherwise than as a dealer in shares. In any event, the assessee had disclosed all primary and material facts in its return relating to the said transaction and there was nothing on record to show that the assessee had deliberately concealed, its income or had furnished inaccurate particulars of its income. In support of his contentions, learned advocate for the assessee cited the following decisions:
(a) Calcutta Discount Co. Ltd. v. ITO, [1961] 41 ITR 191 (SC). This decision was cited for the proposition laid down by the Supreme Court that whether the sales by an investment company should in law be treated as trading transactions, and the profits made from the sales trading profits liable to tax, was a, matter which it was the Income-tax Officer's task to decide. No duty lay on the company to admit that these transactions were by way of trade.
(b) Commissioner Of Income-Tax (Central), Calcutta v. Produce Exchange Corporation Ltd., [1963] 50 ITR 308 (Cal). The assessee, in this case, a company, carried on business, inter alia, as a dealer in shares. In the earlier assessment years, profits arising out of the assessee's dealing in shares had been brought to tax. In early 1947, the assessee purchased certain shares in a company and in the assessment year in question, sold the same to another company managed by the managing agents of the assessee at a loss. About a year after-the sale, the purchaser company was appointed as the secretary of the company whose shares it had purchased. On these facts, it was held by the Income-tax Officer that the transaction by the assessee was in the nature of investment and disallowed the loss claimed by the assessee. On appeal, the Tribunal found as a fact that the assessee had been found to be a dealer in shares in the earlier assessment years and its profits arising out of such dealings had been brought to tax. The Tribunal found further that in the transaction in issue, the shares had been purchased with borrowed money and both the purchase and sale of the said shares were at the prevailing market rate. One of the objects of the assessee was to carry on business in dealing in shares. On these facts, the Tribunal came to the conclusion that the loss incurred by the assessee was a trade loss. On a reference, this court confirmed the finding of the Tribunal. It was held that the fact that the purchaser had ultimately acquired the secretaryship of the company whose shares had been sold was not decisive of the question whether the transaction was an investment or a dealing in shares.
(c) Burmah-Shell Oil Storage and Distributing Co. of India Ltd. v. ITO, [1978] 112 ITR 592 (Cal). In this case, the assessee filed a return showing a loss in the assessment year in question. The assessee had claimed deduction for loss on devaluation of depreciation of its fixed assets. The depreciation had been claimed at a higher figure on the basis of the devaluation of the rupee. The Income-tax Officer disallowed the entire claim and assesssed the income of the assessee at Rs. 8 lakhs. The assessment was confirmed on appeal by the Appellate Assistant Commissioner. During the pendency of the appeal by the assessee to the Appellate Tribunal, the Income-tax Officer initiated penalty proceedings under section 271(1)(c) of the Income-tax Act, 1961, and referred the same to the Inspecting Assistant Commissioner. The Inspecting Assistant Commissioner issued a notice to the assessee to show cause why the provisions of the Explanation to section 271(1)(c) should not be applied.
The assessee challenged the penalty proceedings by a writ petition in this court. A.N Sen J., as his Lordship then was, held, inter alia, that at the time of the initiation of penalty proceedings, the authority concerned had proceeded on the basis of section 271(1)(c) of the Act and did not rely on the Explanation and, therefore, the Explanation could not apply. It was further held that in any event, even if the Explanation could be invoked, it would have no application in the absence of any fraud or gross or wilful neglect on the part of the assessee. The impugned penalty proceedings were quashed.
(d) Cement Marketing Co. of India Ltd. v. Assistant Commissioner of Sales Tax, [1980] 124 ITR 15 (SC). In this case, the assessee in its return of sales tax under the Madhya Pradesh General Sales Tax Act, 1958, and the Central Sales Tax Act, 1956, failed to include the freight charges which were included in the price. The Appellate Assistant Commissioner of Sales Tax made an order of assessment including the amount of freight in the taxable turnover of the assessee and levied tax on the same. The Appellate Assistant Commissioner also imposed penalty on the assessee on the ground that the assessee had failed to disclose in its return the amount of freight which formed part of the taxable turnover. By special leave, the assessee preferred appeal from the said order of assessment directly to the Supreme Court. The Supreme Court, following the decision in Hindustan Sugar Mills v. State Of Rajasthan & Others, (1978) 4 SCC 271 : AIR 1978 SC 1496, held that the amount of freight formed part of the sale price within the meaning of the Madhya Pradesh Sales Tax Act and the Central Sales Tax Act and that such freight had been rightly included in the taxable turnover of the assessee. The Supreme Court, however, held that by not including the amount of freight in its taxable turnover, the assessee could not be said to have filed a false return. The Supreme Court observed that a return could not be said to be false unless there was an element of deliberateness in it. Where the incorrectness of the return was found to be due to want of care on the part of the assessee and there was no reasonable explanation from the assessee for such want of care, the court might infer deliberateness and the return may be held to be a false return. Where the assessee excluded a particular item from the taxable turnover in the bona fide belief that he is not liable to include it, the return could not be condemned to be a false return and penalty imposed.
(e) Commissioner Of Income-Tax v. M.B Engineering Works (P.) Ltd., [1986] 158 ITR 509. This decision of a Division Bench of this court was cited for the following observation on section 271(1)(c) of the Income-tax Act, 1961 (p. 517):
“Explanation to section 271(1)(c) presumes fraud or gross or wilful neglect on the part of the assessee in the circumstances stated therein. The presumption is a rebuttable presumption. The assessee is to discharge the onus. The presumption would be inoperative if it is rebutted by evidence. The onus then shifts to the Department to prove that the assessee has concealed the income or has furnished inaccurate particulars thereof. The assessee has to explain the reasons for the difference in returning the correct income if the income returned is less than 80% of the income assessed. At this stage, the assessee is only required to explain the gap between the income returned and the income assessed. The explanation may be accepted or rejected by the Department. But mere rejection of the explanation even in respect of the gap or difference cannot ipso facto prove that there has been concealment. The circumstances must lead to the only reasonable and positive inference that the explanation of the assessee is false. As a matter of fact, the Explanation to section 271(1)(c) has a material bearing on the question of mental element or mens rea. The mental element or mens rea is an integral part of section 271(1)(c) read with the Explantaion. The circumstances must show that there was animus. The onus of proof has been shifted in certain contingencies to the assessee by reason of rebuttable presumption introduced by the Explanation. The presence or absence of mental element has to be proved. The shifting of onus under certain circumstances has not materially affected the law even after the introduction of the Explanation.”
19. Learned advocate for the Revenue contended to the contrary. He submitted that in the instant case, it has been found by the Tribunal as a fact that the assessee was proceeding under a plan to acquire shares of Chamurchi Tea Co. Ltd. by way of investment in order to obtain control of the latter company. The Tribunal further found that the assessee had consciously made a wrong claim of loss and deliberately reduced (its income) in its return for the assessment years in question. He submitted further that this finding has not been challenged by the assessee and has become final and, therefore, on the facts as found, the court should not interfere with the order of the Tribunal.
20. It appears that the Inspecting Assistant Commissioner who passed the order of penalty held that, on the facts, section 271(1)(c) of the Income-tax Act read with the Explanation thereto was applicable. The Tribunal agreed with the order of the Inspecting Assistant Commissioner and held that the assessee was guilty of concealment under section 271(1)(c) of the Act read with the Explanation thereto and was liable to the penalty imposed.
21. It is not the case of the assessee that the Explanation to section 271(1)(c) of the Act does not apply to the facts. Under the said section 271(1)(c) and the Explanation thereto, a presumption can be said to have arisen that the assessee had concealed its income or had furnished inaccurate particulars thereof. Law appears to be settled that such presumption is rebuttable and we are called upon to examine whether the assessee, in the instant case, succeeded in rebutting the presumption. If it is held that the presumption has been rebutted by the assessee, it then has to be examined whether the Revenue was able to prove on material or evidence on record that the assessee had concealed its income or had furnished inaccurate particulars thereof. The mental element or mens rea of the assessee has to be established.
22. From the order of Tribunal, it appears that the assessee had advanced arguments in the penalty proceedings which were the same as those urged before the Tribunal in the appeal of the assessee from the order of assessment. The assessee sought to establish that the transactions had by it in the shares of Chamurchi Tea Co. Ltd. were those of a dealer in shares and not those of an investor. It was contended that the assessee was entitled to revalue the shares of the said Chamurchi Tea Co. Ltd., purchased by it, in the manner it was done, as a dealer.
23. The Tribunal has found the following facts:
(a) The assessee had acquired the shares of Chamurchi Tea Co. Ltd. by way of investment and did not have any intention to deal in the said shares.
(b) As a result of the acquisition of the said shares by the assessee of Chamurchi Tea Co. Ltd., there was a change in the board of directors of the latter company.
(c) There was no evidence to show that the assessee had included the said shares of Chamurchi Tea Co. Ltd. in its stock-in-trade.
(d) Subsequently, the assessee sold and transferred the said shares to the members of the Kejriwal family who were in control of the assessee at greatly reduced prices.
(e) The revaluation of the shares of Chamurchi Tea Co. Ltd. by the assessee in the relevant assessment year was without any basis and had no relationship with the break-up value of the shares.
24. From the facts as aforesaid, the Tribunal came to the conclusion that the assessee had a plan to acquire the shares of Chamurchi Tea Co. Ltd. for obtaining the controlling interest in the latter company. All the facts were known to the assessee in spite of which the assessee consciously and deliberately claimed a loss on revaluation of the said shares and thereby deliberately reduced its income for the assessment year in question. Accordingly, the assessee was held to be guilty of concealment.
25. The dealings and transactions by the assessee with the shares of Chamurchi Tea Co. Ltd., as found by the authorities below, have not been disputed by the assessee. The assessee did not adduce any further material or evidence in the penalty proceeding apart from those which was already on record in the assessment proceedings. None of the facts found by the Tribunal has been challenged by the assessee as perverse or unreasonable or based on no evidence.
26. By reason of the aforesaid, in our view, there was sufficient material before the Tribunal to come to the conclusion that the assessee was guilty of deliberate concealment and furnishing of inaccurate particulars of income. We note that on the materials on record and on the facts as found, it might be possible to take a different view but, exercising an advisory jurisdiction, we are unable to treat this reference as an appeal and come to a conclusion or arrive at a finding different from that of the Tribunal.
27. The contention of the assessee that it had disclosed all primary facts in its return and, therefore, the penalty proceedings could not be validly initiated or concluded is of little substance. This is not a case of reopening. The penalty proceedings, in our view, were validly initiated on the basis of the Explanation to section 271(1)(c) of the Act. Whether the assessee disclosed primary facts or not is of little relevance. It was for the assessee to rebut the presumption arising under the said section. Even if it assumed that the assessee had succeeded in rebutting the presumption, the facts which were found by the Tribunal and on the basis of which the Tribunal proceeded constituted proof for the purpose of the Revenue. For the above reasons, the contentions of the assessee are not accepted. We answer the question referred in the affirmative and in favour of the Revenue. In the facts and circumstances, there will be no order as to costs.
Monjula Bose, J.:— I agree.