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Mahavir Metal Works v. Commissioner Of Income-Tax, Punjab.

Punjab & Haryana High Court
Jan 3, 1973
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Smart Summary (Beta)

Structured Summary: Income-tax Reference No. 12 of 1972

Factual and Procedural Background

The petitioner-firm, Messrs. Mahavir Metal Works, Kapurthala, manufactured and sold aluminium utensils and maintained branches at Delhi and Trivandrum (the Trivandrum branch traded as Kolpunj Enterprises and manufactured bandsaw blades and wire netting). The Trivandrum branch closed around August 1963. During assessment proceedings for the assessment year 1964-65 the Income-tax Officer queried the firm about certain loans allegedly raised from parties at Madras against hundis for a specified period.

The firm produced hundis and stated that some loans and interest payments had been effected by drafts, but the Income-tax Officer demanded production of the lenders with confirmatory letters. The firm said it could not produce the persons because of the branch closure and unknown whereabouts of the lenders, and the firm surrendered loan amounts aggregating Rs. 35,000. The Rs. 35,000, together with interest of Rs. 2,728, were assessed as the firm's income from undisclosed sources. In subsequent penalty proceedings a penalty of Rs. 12,000 was imposed. The Tribunal upheld the penalty. The High Court was asked to answer the following referred question:

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the penalty was exigible under section 271(1)(c)?”

Legal Issues Presented

  1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the penalty was exigible under section 271(1)(c)?

Arguments of the Parties

Petitioner (Assessee) — Arguments

  • The firm relied on the proposition that penalty proceedings are penal in nature and that the department must prove concealment of particulars of income; mere surrender or admission does not automatically sustain a penalty.
  • The petitioner-firm relied on decisions such as Commissioner of Income Tax, West Bengal v. Anwar Ali, and other cases (Gumani Ram Siri Ram; Krishan Lal Shiv Chanel Rai; Surajlal Mannalal) to argue that the penalty should not have been imposed in the present circumstances.
  • In the written plea (annexure “A”) the firm stated: “The assessee did not conceal any income but agreed to be assessed on these amounts because the creditors were in far off places, and it was difficult to locate them and produce them before the Income-tax Officer. The assessee had produced whatever evidence he had before the Income-tax Officer to show that these were genuine loans. In any case in penalty proceedings the onus is on the department to prove the concealment of income.”

Revenue — Arguments

  • The department contended that penalty proceedings being penal in nature require the department to prove concealment, but where the assessee himself admits the amount to be income (by filing a revised return) the department may discharge its onus by proving that admission.
  • Once the department established the assessee's admission in the revised return, and the assessee failed to lead evidence in the penalty proceedings to show that the admission was incorrect or not binding, the penalty could be validly imposed.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Commissioner Of Income Tax, West Bengal v. Anwar Ali ([1970] 76 I.T.R 696; [1971] 1 S.C.R 446 S.C.) Penalty proceedings are penal in nature; burden is on department to prove concealment; a mere false explanation does not conclusively prove that a receipt is income; findings in assessment are prima facie but not conclusive in penalty proceedings. The Court acknowledged the principle but held Anwar Ali was of no help to the petitioner because here the assessee filed a revised return admitting the amounts as income; therefore the department discharged its onus by proving that admission unless the assessee proved the admission wrong in penalty proceedings.
Commissioner of Income-tax v. Khoday Eswarsa and Sons ([1972] 83 I.T.R 369 S.C.) Supports the general principle about the penal nature of penalty proceedings and the burden on the department (cited alongside Anwar Ali). Used as part of the authorities establishing the law that penalty proceedings require the department to prove concealment, with assessment findings not being conclusive.
Jawahar Woollen Textile Mills v. Commissioner of Income-tax (I.T.R No. 35 of 1971) Illustrates that Anwar Ali may not be applicable in similar factual circumstances where material supports concealment despite earlier authority. The Court relied on this Division Bench decision to support the view that in similar circumstances Anwar Ali was inapplicable and that there was material supporting concealment on the record.
Durga Timber Works v. Commissioner Of Income-Tax (Delhi High Court) Where the assessee admitted that certain amounts could be treated as concealed income during assessment, it would be impractical to require the department to produce independent evidence of concealment in penalty proceedings; penalty can be justified on the admission. The Court cited this decision as taking the same view adopted in the present case and applied the principle that an admission in assessment can suffice for the department to discharge its onus in penalty proceedings.
Commissioner of Income-tax v. Surajlal Mannalal (Madhya Pradesh High Court) The Court noted that the decision was on different facts and therefore not helpful to the petitioner. Distinguished on the basis of different facts; the Court did not apply the decision to support the petitioner's case.
Gumani Ram Siri Ram v. Commissioner of Income-tax ([1972] 85 I.T.R 67 Punj.) Where the assessee surrendered an amount for tax purposes but did not state it was his income, that factual distinction matters for penalty considerations. Distinguished: the Court observed that in Gumani Ram Siri Ram the assessee did not explicitly state the amount was his income, whereas in the present case the assessee filed a revised return admitting the amount as income.
Krishan Lal Shiv Chanel Rai v. Commissioner of Income-tax (I.T.R No. 42 of 1971) Where an assessee, when faced with a penalty notice, positively pleads that he should be allowed an opportunity to prove previous admissions were incorrect and that opportunity is denied, penalty proceedings can be vitiated by denial of that opportunity. The Court distinguished that decision from the present facts: in Krishan Lal the assessee had demanded an opportunity in penalty proceedings but was denied; in the present case the assessee did not take such a plea in the penalty proceedings and did not lead evidence to contradict his earlier admission.

Court's Reasoning and Analysis

The Court analysed the matter in light of the accepted legal position that penalty proceedings under section 271(1)(c) are penal in nature and therefore the department bears the onus of proving concealment of particulars of income. The Court reiterated that:

  • A mere false explanation by an assessee does not automatically establish that a disputed amount is his income; assessment findings that reject an explanation are prima facie relevant but not conclusive in penalty proceedings.
  • Because of the penal character of penalty proceedings, the department must ordinarily lead evidence to show that a disputed amount is a revenue receipt and that the assessee consciously concealed or deliberately furnished inaccurate particulars.

The Court then applied those principles to the facts before it. Crucial to the Court's conclusion was that the assessee itself filed a revised return during assessment proceedings in which it admitted the disputed amounts as its income. The Court treated that admitted fact as one the department could prove in the penalty proceedings to discharge its onus, unless the assessee in those proceedings could prove that the admission was incorrect, unlawfully procured, or not binding.

The Court examined the record of the penalty proceedings and concluded that the department discharged its onus by proving the assessee's admission in the revised return. The assessee did not lead evidence during penalty proceedings to show that the admission was wrongly made or should not be relied upon. The Court distinguished authorities relied upon by the petitioner where either there had been no admission of the amount as income (Gumani Ram Siri Ram), the facts were materially different (Surajlal Mannalal), or the assessee had been denied an opportunity to prove the admission wrong (Krishan Lal). The Court also relied on precedents and decisions (including Jawahar Woollen Textile Mills and Durga Timber Works) that supported the proposition that where an assessee admits amounts as income, it would be impracticable and unduly burdensome to require the department to produce wholly independent evidence of concealment in penalty proceedings.

On these grounds the Court concluded that the entirety of circumstances—most importantly the assessee's own admission and the absence of contradictory evidence from the assessee in penalty proceedings—reasonably pointed to the conclusion that the disputed amount represented income and that the assessee had thereby rendered himself liable to penalty.

Holding and Implications

Holding: The referred question was answered in the affirmative; the Tribunal was justified in holding that the penalty under section 271(1)(c) was exigible. The Court answered the question in favour of the revenue and awarded costs.

Direct consequences: The Court sustained the imposition of penalty (as upheld by the Tribunal) because the department had proved the assessee's admission in the revised return and the assessee did not succeed in displacing that admission in the penalty proceedings by leading evidence.

Broader implications: The Court did not purport to lay down a novel rule of law; rather it applied established principles about the penal character of penalty proceedings, the departmental burden of proof, and the evidentiary significance of an assessee's admission in a revised return. Where an assessee admits an amount to be income in assessment proceedings, the department may rely on that admission in penalty proceedings unless the assessee proves the admission was incorrect or not binding; denying penalty on those facts would, in the Court's view, unduly burden enforcement.


Disposition: Question answered in the affirmative; costs awarded. (Prem Chand Pandit, J. agreed.)

Show all summary ...

B.S Dhillon, J.:— This judgment will dispose of Income-tax Reference No. 12 of 1972.

2. Briefly stated, the facts giving rise to this reference are that the petitioner-firm, Messrs. Mahavir Metal Works, Kapurthala, is engaged in the manufacture and sale of aluminium utensils with its head office at Kapurthala. This firm, apart from its branch at Delhi, had another branch at Trivandrum under the style of Kolpunj Enterprises where it was carrying on the business of manufacture and sale of Bandsaw Blades and wire netting. The petitioner-firm is alleged to have raised loans from some of the parties at Madras which were taken against hundis for a specified period. The branch of the petitioner-firm at Trivandrum was closed some time during August, 1963. In the course of assessment proceedings, for the assessment year 1964-65, the Income-tax Officer enquired from the petitioner-firm about these loans. The firm produced evidence in the form of hundis before the Income-tax Officer. The Income-tax Officer was also informed that some of the loans were received by drafts and even the payments towards interest were made by drafts. The Income-tax Officer was not satisfied and he required the petitioner-firm to produce the parties along with their confirmatory letters. This could not be done as, according to the petitioner-firm, the business at Trivandrum had been closed and the latest whereabouts of the persons from whom the loans were taken were not known. Therefore, the firm surrendered the loan amounts aggregating to Rs. 35,000 raised from these parties. The said amount of Rs. 35,000, along with the interest of Rs. 2,728 alleged to have been paid to these parties, were thus assessed as the income of the petitioner-firm and subsequently in the penalty proceedings, on these facts, a penalty of Rs. 12,000 was imposed. The petitioner-firm filed an appeal before the Tribunal that no penalty was exigible, but the Tribunal taking note of the surrender of the amount of Rs. 35,000 as the assessee's income from undisclosed sources came to the conclusion that the penalty was exigible. It is on these facts that the following question of law has been referred for our opinion:

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the penalty was exigible under section 271(1)(c)?”

3. After hearing the learned counsel for the parties I am of the opinion that this question must be answered in the affirmative and in favour of the revenue. It is well-settled by now that the penalty proceedings are of a penal nature and it is for the department to establish that the assessee was guilty of concealment of the particulars of income. The mere fact that the assessee has given a false explanation, does not prove that the disputed amount constitutes income of the assessee. Moreover, the finding given during the course of the assessment proceedings that a particular receipt is income after rejecting the explanation given by the assessee as false would, prima facie, be sufficient for establishing in the penalty proceedings that the disputed amount was the assessee's income, but it must be remembered that since the said proceedings are of penal nature, the burden is on the department to prove that a particular amount is a revenue receipt. The finding given in the assessment proceedings that the explanation furnished by the assessee was false cannot be taken to be conclusive. Before the penalty can be imposed, the entirety of the circumstances must reasonably point to the conclusion that the disputed amount represented income and that the assessee had consciously concealed the particulars or had deliberately furnished inaccurate particulars. Reference in this connection may be made to Commissioner Of Income Tax, West Bengal v. Anwar Ali [1970] 76 I.T.R 696; [1971] 1 S.C.R 446 S.C. and Commissioner of Income-tax v. Khoday Eswarsa and Sons [1972] 83 I.T.R 369 S.C.. Therefore, keeping in view this position of law, the facts of the present case have to be examined. It is clear from the order of the Inspecting Assistant Commissioner of Income-tax, Jullundur Range, Jullundur, annexure “A”, that the petitioner-firm filed a revised return of the income in question wherein the firm itself showed this amount as its income and it was in view of this admission of the assessee that the amount in question was assessed as income of the assessee from undisclosed sources. It was a different matter if the assessee during the course of the assessment proceedings would have failed to prove the explanation given by him about this amount having been taken as a loan from three parties and the Income-tax Officer might have recorded a finding that the explanation furnished by the assessee was not proved. In that case, during the subsequent penalty proceedings, it was incumbent upon the income-tax authorities to have discharged its onus by leading evidence to show that the undisclosed amount was the income of the assessee and once it was proved that the same was the income of the assessee and that the assessee had concealed the particulars of income or had deliberately furnished inadequate particulars of such income, the penalty could be imposed. But in a case where the assessee himself, during the course of the assessment proceedings, files a revised return and owns the amount in question as his income and he also having earlier filed a return concealing the said income by deliberately furnishing inaccurate particulars of that income, the moment the said admission of the assessee is proved by the department during the course of the penalty proceedings the onus on the department is discharged. In that situation, the assessee is put to proof and it is open to the assessee to prove in the penalty proceedings that the admission made by him during the course of the assessment proceedings was wrongly or illegally made or was incorrect. He can, by leading evidence in the penalty proceedings, prove that the explanation put forth by him that the amount in question was a loan taken by the assessee was correct and if he is able to show during the course of the penalty proceedings that the explanation furnished was correct, no penalty can be levied. The learned counsel for the petitioner-firm relied on Anwar All's case decided by their Lordships of the Supreme Court. In my opinion, the said decision is of no help to the petitioner, keeping in view the fact that the petitioner himself owned the amount in question as his income by filing a revised return and having failed to prove during the course of the penalty proceedings that the explanation furnished by him earlier that the said amount was a loan was correct. In I.T.R No. 35 of 1971 (Jawahar Woollen Textile Mills v. Commissioner of Income-tax) decided on January 17, 1972, a Division Bench of this court, in more or less similar circumstances, came to the conclusion that the decision in Anwar Ali's case was not applicable and it was found that there was material on the record on which the Inspecting Assistant Commissioner and the Tribunal came to the conclusion that there was concealment of the income. The Delhi High Court in Durga Timber Works v. Commissioner Of Income-Tax. also took the same view as I am inclined to take in this case. In that case during the course of the assessment proceedings of the firm, Durga Timber Works, the Income-tax Officer noticed cash credits to the tune of Rs. 17,500 in certain accounts and the accounts were shown as squared up. Similarly, a sum of Rs. 36,900 was shown in the assessee's books as having been invested in a supposed factory out of which a sum of Rs. 22,800 was shown as adjusted. But, for the balance of Rs. 14,100 no explanation was given. When the assessee was asked to adduce evidence to establish these cash credits and to explain the source of investment of Rs. 14,100, it admitted that the two amounts could be treated as its concealed income and included in its total income for that year. On these facts, a penalty notice was issued to the assessee, and it was held by the Division Bench of the Delhi High Court that, in these circumstances, it would amount to laying an impossible burden of proof on the department and making the provisions for imposition of penalty wholly unworkable if even after the assessee had admitted that the two amounts could be treated as its concealed income, the department had still to prove by independent evidence that the assessee had concealed its income. The levy of penalty for concealment of income was justified.

4. The decision of the Madhya Pradesh High Court in Commissioner of Income-tax v. Surajlal Mannalal is of no help to the petitioner as the said case was decided completely on different facts.

5. Similarly, a case in Gumani Ram Siri Ram v. Commissioner of Income-tax [1972] 85 I.T.R 67 Punj.. relied upon by the learned counsel for the petitioner, is not applicable to the facts of the present case. In that case, no doubt, the assessee did not furnish any explanation for the amount in question and he surrendered the amount for the purposes of the tax, but he did not make any statement that the amount in question was his income. This statement of fact was specifically noted by the Bench during the course of the judgment when it was stated as follows:

“In the present case the assessee furnished no explanation for the cash credit entries of Rs. 12,000. He surrended this amount for the purpose of tax. But he made no statement that this amount was his income.”

6. This case is clearly distinguishable from the facts of the present case because in the present case the assessee himself filed the revised return wherein he admitted the amount in question to be his income, and it was only for the department to have proved the admission of the assessee during the course of the penalty proceedings though it was open to the assessee to lead evidence to show that the said admission was not correctly made or was not binding on him.

7. The only other case on which the learned counsel for the petitioner relies is I.T.R No. 42 of 1971, Krishan Lal Shiv Chanel Rai v. Commissioner of Income-tax decided by a Division Bench of this court on December 18, 1972. That decison is also not helpful to the learned counsel for the assessee because in that case when a notice for imposing the penalty was issued to the assessee, he took positive plea during the course of the penalty proceedings that he should be given an opportunity to prove that the credits on the basis of hundis in favour of third parties which it had surrendered during the course of assessment proceedings were in fact the credits of genuine parties and it was only for the sake, of avoiding botheration that the assessee-firm surrendered these credits being taken as the income of the firm through undisclosed sources. The Inspecting Assistant Commissioner refused to give an opportunity to the assessee-firm to prove these assertions and imposed the penalty. It was, therefore, on these facts, contended before the Bench that the penalty proceedings being penal in nature, the assessee was entitled to an opportunity to prove that the amount in question was not his income and he was entitled to explain away his admission which he made during the course of the assessment proceedings. The Bench came to the conclusion that the assessee had demanded such an opportunity but the same was not afforded and it was held as follows:

“It is an established principle of law that a party is entitled to show and prove that an admission made by him previously is in fact not correct and true. In the instant case the assessee had definitely alleged that the amounts surrendered were not in fact his undisclosed income, that the hundis in favour of the creditors were genuine and that the surrender was made simply to avoid botheration. That being so it was incumbent upon the Inspecting Assistant Commissioner to have afforded the assessee full opportunity to prove its assertions, it was an indisputable right which had been denied to the assessee without any justification.”

8. In the present case, when the assessee was given a notice during the penalty proceedings, the assessee did not take the plea that the amounts in question were loans and that the assessee was prepared to lead evidence to prove this fact. The plea of the assessee in the penalty proceedings, as is contained in annexure “A”, is in the following words:

“The assessee did not conceal any income but agreed to be assessed on these amounts because the creditors were in far off places, and it was difficult to locate them and produce them before the Income-tax Officer.

The assessee had produced whatever evidence he had before the Income-tax Officer to show that these were genuine loans. In any case in penalty proceedings the onus is on the department to prove the concealment of income.”

9. It is thus obvious that the department discharged the onus of proof by confronting the assessee with his own admission which he made by filing the revised return owning the amount in question to be his income and the assessee having failed to lead any evidence to show that the said admission was incorrectly made or should not be relied upon, no fault can be found with the income-tax authorities levying the penalty on the assessee.

10. For the reasons recorded above, the question referred to us is, therefore, answered in the affirmative with costs.

Prem Chand Pandit, J.:— I agree.

11. Question answered in the affirmative.