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Case Number

D.B Income-tax Reference No. 21 of 1984

Judges

Mr. V.G. Palshikar
Mr. Virendra Kumar Singhal

Acts

provisions of section 271(1)(c)
provisions of section 43(5)
section 271(1)(c)

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Smart Summary

Structured Summary of the Opinion (V.K. Singhal, J.)

Factual and Procedural Background

The assessee is a manufacturer of groundnut oil and dealer in oil and oil-cakes. On October 18, 1973, the assessee entered into an agreement to purchase 43 tonnes of oil-cakes from Smt. Usha A. Agrawal; a similar agreement for 43 tonnes was entered into with Shri Suresh K. Agrawal on October 23, 1973. Both contracts were settled on October 20 and October 24, 1973 respectively, without taking delivery, and a difference of Rs. 10,750 was paid to each party. The actual payments were made in the following year and corresponding credits were shown in the parties' accounts.

During assessment proceedings the Income-tax Officer (ITO) examined the balance-sheet entries and the assessee's books. The assessee claimed the payments as a business loss; the ITO treated the amount of Rs. 21,500 as a speculative loss, disallowed it, and initiated penalty proceedings. The Appellate Assistant Commissioner upheld the levy of penalty, finding that the assessee had failed to disclose particulars and had not discharged the burden placed on it by the Explanation to section 271(1)(c). In the second appeal, the Income-tax Appellate Tribunal (the Tribunal) cancelled the penalty, concluding that no facts had been suppressed and that entries in the books of account showed the payments as differences to contract parties; the Tribunal relied on the Calcutta High Court decision in CIT v. Anglo-Indian Jute Mills Co. Ltd. The Revenue requested a reference, and the Tribunal referred the following question of law under its order dated June 17, 1982:

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in cancelling the penalty of Rs. 21,500 levied under section 271(1)(c) of the Income-tax Act, 1961?”

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in cancelling the penalty of Rs. 21,500 levied under section 271(1)(c) of the Income-tax Act, 1961?

Arguments of the Parties

Revenue's Arguments

The ITO considered that the assessee adopted a tactic of showing the entries in the balance-sheet to reduce taxable income and avoid payment of tax.
The assessee failed to discharge the burden placed by the Explanation to section 271(1)(c) to prove absence of concealment or inaccurate particulars; no evidence was produced to show absence of fraud or wilful or gross negligence.
Entries were not reflected in the trading or profit & loss accounts and were only discovered during scrutiny of the balance-sheet, indicating nondisclosure in the return; on these grounds the penalty was justified.

Assessee's Arguments

The assessee claimed the amounts as a business loss (or alternatively as damages for breach of contract) rather than speculative loss.
The assessee relied on judicial authority (notably Commissioner Of Income Tax, West Bengal v. Anwar Ali and CIT v. Anglo-Indian Jute Mills Co. Ltd.) to contend that the ingredient of concealment was not present and that damages for breach are not speculative loss.
The assessee pointed to entries in the books showing the payments as differences paid to the contract parties and asserted there was no suppression of facts; the Tribunal relied on these entries in cancelling the penalty.

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 ITR 696 (SC)	Cited by the assessee to argue that the ingredient of concealment was not present and that penalties under section 271(1)(c) may not apply where concealment is absent.	The Court observed that this decision was relied upon by the assessee but held that it had no relevance on account of subsequent amendment in law; it did not support discharge of the initial burden by the assessee in the facts of this case.
CIT v. Anglo-Indian Jute Mills Co. Ltd., [1980] 124 ITR 384 (Calcutta High Court)	Held that damages for breach of contract after breach are not in the nature of speculative loss (relied on by the Tribunal and the assessee).	The Tribunal took support from this decision in concluding that the assessee could have considered the payment as damages rather than speculative loss and therefore cancelled the penalty. The Court noted the decision but found that the Tribunal erred in its approach because the initial burden under the Explanation to section 271(1)(c) had not been discharged by the assessee.
Badri Prasad Om Prakash v. Commissioner Of Income-Tax, [1987] 163 ITR 440 (Supreme Court)	This Court upheld levy of penalty under section 271(1)(c) where speculative loss was added to commercial profit and a revised return was filed; filing a revised return did not mitigate the offence.	The Court referred to this decision as support for the view that cancellation of the penalty was not justified where the assessee had not discharged the initial burden; it reinforced the conclusion that the Tribunal erred in cancelling the penalty.

Court's Reasoning and Analysis

The Court's analysis proceeded by examining the Explanation to section 271(1)(c) and the allocation of burden thereunder. The Explanation contemplates that where assessed income is correct but the failure to return income is due to concealment of particulars or furnishing inaccurate particulars, an initial burden lies on the assessee to rebut the presumption by placing material or evidence establishing a preponderance of probability.

The Court emphasized the following steps in its reasoning:

Clarification of burden: The initial burden is on the assessee to prove absence of fraud or wilful/gross negligence; this burden is rebuttable but must be discharged by the assessee with evidence or material from which a reasonable presumption can be drawn. Mere denial is insufficient.
Assessment of what the assessee produced: In this case the assessee produced only an explanation (including reliance on precedent such as Anwar Ali and Anglo-Indian Jute Mills) but did not place positive evidence before the assessing officer to discharge the initial burden. The Court held that simply showing entries in books of account or pointing to possible alternate legal interpretations was not enough unless the initial burden was discharged.
Critique of the Tribunal's approach: The Tribunal erred in law by treating the mere existence of entries in the books of account as dispositive that there was no concealment and that it was for the ITO to examine the entries. The Court explained that the Tribunal should first have considered whether the assessee had discharged the initial burden under the Explanation; only thereafter could it consider whether the entries negated concealment.
Distinction between incorrect particulars and concealment: The Court underscored that furnishing inaccurate particulars is conceptually distinct from concealing particulars; concealment may involve nondisclosure in the return or even omission from books, and cannot be dismissed simply because some entry exists in the books.
Application of the statutory definition: Under section 43(5) a speculative transaction is defined as one settled otherwise than by actual delivery. The Court noted that the assessee settled contracts without delivery, and the manner of entries (not in trading account but direct party credits) and absence of explanatory notes in the return weighed against finding that the initial burden was discharged.
Reliance on precedent: The Court observed the Tribunal relied on Anglo-Indian Jute Mills to suggest an arguable view favourable to the assessee, but found that the Tribunal failed to examine whether section 43(5) permitted two reasonable interpretations in the assessee's favour and whether, on that basis, the initial burden could be said to have been discharged. The Court also relied on Badri Prasad Om Prakash as authority that cancellation of penalty is not warranted where speculative loss additions are sustained and the initial burden has not been properly discharged.

On the facts, the Tribunal's cancellation of penalty was held to be legally unsustainable because the assessee had not discharged the initial burden imposed by the Explanation to section 271(1)(c), and the Tribunal wrongly shifted the burden to the Revenue by placing decisive weight on the existence of entries in the books.

Holding and Implications

Core Ruling: The reference is answered against the assessee and in favour of the Revenue; the Tribunal was not justified in cancelling the penalty of Rs. 21,500 levied under section 271(1)(c) of the Income-tax Act, 1961.

Implications:

Direct effect: The Court's decision restores the correctness of the penalty levy — the Tribunal's order cancelling the penalty is reversed in substance by answering the referred question against the assessee.
Burden principle reaffirmed: The opinion reiterates that under the Explanation to section 271(1)(c) the initial burden to rebut the presumption of concealment rests on the assessee and must be discharged by positive evidence or material; mere assertions or reliance on entries in books without prior proper disclosure do not suffice.
Scope of precedent: The Court noted earlier decisions cited by the parties but found that Anwar Ali was inapplicable because of amendment in law and that reliance on Anglo-Indian Jute Mills did not justify cancelling the penalty where the initial burden had not been discharged. The opinion does not purport to establish a novel principle beyond the application of these authorities to the facts; it addresses the correctness of the Tribunal's legal approach in this case.

No order as to costs was made in the opinion.

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Commissioner Of Income-Tax v. Raj Trading Co.

V.K Singhal, J.:— On the request of the Revenue, the Income-tax Appellate Tribunal has referred the following question of law under its order dated June 17, 1982, in respect of the assessment year 1974-75:

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in cancelling the penalty of Rs. 21,500 levied under section 271(1)(c) of the Income-tax Act, 1961?”

2. The facts of the case are that the assessee is a manufacturer of groundnut oil and deals in oil and oil-cakes, etc. The assessee has entered into an agreement for the purchase of 43 tonnes of oil-cakes with Smt. Usha A. Agrawal of Bombay on October 18, 1973. A similar agreement for the purchase of 43 tonnes of oil-cakes was entered into with Shri Suresh K. Agrawal on October 23, 1973. The contracts were settled on October 20 and October 24, 1973, respectively, without taking delivery of the goods and the difference of an amount of Rs. 10,750 was paid to each of the parties. The actual payments to these parties were made in the next year and credit was made in the account of the respective parties. During the course of assessment proceedings, the assessee was asked to produce the books of account and details of these credits as was evident from the balance-sheet. The assessee claimed that the amount is a business loss. The contention of the assessee was not accepted and Rs. 21,500 was treated as speculation loss which was disallowed and penalty proceedings were initiated. In the penalty proceedings, it was found that the assessee had not led any evidence to prove that the transaction was not a speculation transaction and the addition so made in the assessment order was upheld by the Income-tax Appellate Tribunal as well.

3. The Income-tax Officer was of the view that the assessee had adopted a tactic of showing the same in the balance-sheet in order to reduce the taxable income and to avoid the payment of legitimate amount of tax. The burden which was on the assessee to prove that there was no intention to conceal its true income was not discharged and as such a penalty of Rs. 21,500 was levied under section 271(1)(a). In the appeal before the Appellate Assistant Commissioner, it was found that instead of taking these transactions in the trading account and in the profit and loss account, the assessee has taken them directly to the accounts of respective parties. The Appellate Assistant Commissioner found that the assessee has made the payments on account of difference of rates and not on account of loss on regular business. It was nowhere mentioned in the return of income submitted by him on July 20, 1974, or in any other account enclosed along with the return and it was only subsequently during the course of scrutiny of the balance-sheet by the Income-tax Officer which was filed by the assessee that these two figures were found. The copies of the entry of Nakal Bahi was also produced in the order in which it was mentioned that oil-cakes purchased at the rate of Rs. 1,225 per tonne have been sold back at the rate of Rs. 975 and the amount of difference was credited. Similarly, entries were made in the oil-cakes accounts from which it was found that it was obligatory on the part of the assessee to have indicated this fact separately in the trading account or profit and loss account furnished by him, but he intentionally omitted to make a reference to the said transaction in the return of income or statement of accounts furnished and, therefore, the Appellate Assistant Commissioner was of the view that the appellant has completely failed to show that the disparity in the income returned and assessed was not the result of any fraud or wilful or gross neglect on the part of the appellant. The burden which was placed under the Explanation to section 271(1)(c) was considered not to have been discharged. The levy of penalty was upheld.

4. In the second appeal before the Income-tax Appellate Tribunal, it was found that the assessee has not made any entries of accounts to disguise the real transaction. It is clearly stated in the books of account that the payment was for difference amount paid to the contract parties. From the books of account, therefore, it was for the Income-tax Officer to examine the correct factual position and the assessee could also consider that such payment of difference could be considered as damages for breach of contract and not speculation loss and reliance has been placed on the decision of the Calcutta High Court in the case of CIT v. Anglo-Indian Jute Mills Co. Ltd., [1980] 124 ITR 384. In these circumstances, it was held that no facts have been suppressed by the assessee and/or made to appear in a way that the apparent state of affairs was not real. It was for the Income-tax Officer to examine the facts and come to the proper conclusion as he has evidently done. The charge of concealment of income, therefore, was held not sustainable and the penalty was cancelled.

5. We have considered over the matter. The Explanation to section 271(1)(c) is applicable inasmuch as the assessment was completed on the income of. Rs. 99,994 and this included the addition of Rs. 21,500. The Explanation contemplates that the amount of the assessed income is correct and failure by the assessee to return the said income was due to concealment of particulars of his income or on account of inaccurate particulars of such income, the burden which has been placed by the Explanation is rebuttable and the initial burden has to be discharged by the assessee by placing material or evidence to prove the preponderance of the evidence. If the initial burden is discharged by the assessee in this manner, then it shifts on the Department to prove that the offence in terms of the provisions of section 271(1)(c) has been committed. The assessee is required to prove the absence of fraud or gross or wilful negligence on his part. The entirety of the circumstances are required to be seen for that purpose. In this matter, the assessee has submitted the return of income declaring it at Rs. 72,500. In the course of assessment proceedings, the Income-tax Officer found from the balance-sheet that the amount of Rs. 10,750 has been shown as outstanding liability in the name of Usha A. Agrawal and a similar amount on the credit of Suresh K. Agrawal in the books of the firm. The Income-tax Officer found that the delivery of oil-cakes has not been given and the transactions are in the nature of speculation. The assessee, instead of taking these figures to the trading account or the profit and loss account, directly debited the oil-cake account and credited the party account. A copy of the entries at pages 100 and 101 of Nahal Bahi has been reproduced by the Appellate Assistant Commissioner in his order. So far as the disallowances are concerned, the matter was challenged up to the level of the Income-tax Appellate Tribunal and the order of the Income-tax Officer was upheld. The finding therefore finally remains that the loss was speculative loss. The Explanation which was given before the Income-tax Officer was that the provisions of section 271(1)(c) are not applicable in view of the decision of the apex court in the case of Commissioner Of Income Tax, West Bengal v. Anwar Ali , [1970] 76 ITR 696 as the ingredient of concealment is not present. It was submitted that the assessee has not submitted less than 80 per cent., of the income and it was not fraud or wilful negligence on his part. In the light of the explanation which has been given by the assessee it has to be considered whether the initial burden which was on the assessee has been discharged or not. The Tribunal has observed that the assessee has not made any entries in the books of account that the payment was for the difference paid to the contracting parties. The books of account were there for the Income-tax Officer to examine. In the state of law then existing, the assessee could also consider that the loss arose not from speculative transaction. It also took support from the latest decision of the Calcutta High Court in the case of CIT v. Anglo-Indian Jute Mills Co. Ltd., [1980] 124 ITR 384. Taking into consideration these facts the Tribunal came to the conclusion that no facts have been suppressed by the assessee. It was for the Income-tax Officer to examine the facts and come to the proper conclusion as he has evidently done, but a charge of concealment of income cannot obviously be sustained in the circumstances of the case.

6. From the observations of the Tribunal two things are apparent, (i) that the state of law as it was existing at that time led the assessee to believe that the loss arose not from the speculative transactions; and (ii) it was for the Income-tax Officer to examine the books of account and since the entries were in the books of account, the assessee cannot be said to have made any entry to disguise the real nature of the transaction.

7. Firstly, the basic requirement of the Explanation to section 271(1)(c) was to discharge the initial burden by the assessee to prove that it was not on account of fraud or wilful negligence on the part of the assessee. No evidence was produced by the assessee, and only the explanation was given. The first part of the explanation given refers to the decision in the case of Commissioner Of Income Tax, West Bengal v. Anwar Ali , [1970] 76 ITR 696 (SC) which has no relevance on account of amendment in law. The question of application of the main provision or the burden which was to be discharged by the assessing authority could have arisen only if the initial burden had been discharged by the assessee. In the second part of the explanation given, it was submitted by the assessee that there was no fraud or wilful negligence on his part. It cannot be considered to be the discharge of his burden. The assessee has to place the material on the basis of which it could be considered that the initial burden which was on him has been discharged. Simply by denying the fact the burden is not discharged. There should have been something positive, may be by way of evidence on the basis of which it could be reasonably be presumed that there was no fraud or gross and wilful negligence on the part of the assessee. Taking into consideration the observations of the Income-tax Appellate Tribunal it may be considered that the Tribunal has wrongly proceeded on the assumption that the entries were made in the books of account and there was no disguise to the real nature of the transaction, and it was for the Income-tax Officer to examine. The Tribunal has committed an error in law as the first thing which was to be seen was whether the initial burden by the assessee has been discharged or not. There may be a number of entries in the books of account and something is detected thereafter, it cannot, in all cases be said that there is no concealment of particulars of income or furnishing of incorrect particulars of such income. Furnishing incorrect particulars and concealing the particulars of income are different things. The words “furnishing inaccurate particulars of income” refer to the particulars which have been furnished by an assessee of his income and the requirement of concealment of income is that income has not been declared at all or is not even recorded in the books of account or in a particular case the concealment of the particulars of income may be from the books of account as well as from the return furnished and thus, after the initial burden was discharged by the assessee the question of application of the provisions of section 271(1)(c) could have been in that light. The Income-tax Appellate Tribunal was at the stage of examining the point whether the initial burden which was required to be discharged under the Explanation to section 271(1)(c) has been discharged or not and not whether the offence under section 271(1)(c) has been committed or not. The question of existence of the entries in the books of account could have been a valid consideration only after the initial burden which was on the assessee was discharged. At the most the other part which was taken into consideration by the Tribunal could be considered on the basis of which it could or could not be said whether the initial burden was discharged by the assessee and that was stated by the Tribunal that in the state of law then existing the assessee would consider that the loss arose not from speculative transactions and in support of that the decision in the case of Anglo-Indian Jute Mills, [1980] 124 ITR 384, of the Calcutta High Court was taken into consideration. So far as the assessee is concerned, the other point was finally decided by the Tribunal against the assessee that the loss was from speculative transaction. There can be a possibility where there can be two views on a particular interpretation taken by the assessee. In this case, the assessee has not submitted this explanation before the Income-tax Officer where he was required to discharge his initial burden. Even if an explanation was given before the Tribunal to discharge the initial burden the legal position is in support of the assessee as the Calcutta High Court in the case of CIT v. Anglo-Indian Jute Mills, [1980] 124 ITR 384 has taken the view that the damages for breach of contract after breach are not in the nature of speculative loss, the point could have been considered, whether it was a case of the assessee that the amount was paid for damages after the breach has occurred. Nothing has been observed by the Tribunal as to how the provisions of section 43(5) were capable of two interpretations in the case of the assessee. In a case where there is possibility of two interpretations and the plea of the assessee was that it was on account of one of such interpretations which favours him, it could be considered that the initial burden has been discharged. Section 43(5) defines speculative transaction which means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. The assessee has settled the transaction otherwise than by actual delivery and the manner in which the entries were made in the books of account was that instead of debiting the trading account, the oil-cake account was debited and the party account was credited. No note was given either in the return or in the statement furnished along with the return and it was the Income-tax Officer who detected the entry on the basis of which an explanation was called for and ultimately it was found to be not in accordance with law. Simply because an entry was existing in the books of account, it cannot be said that the initial burden of the assessee stands discharged. The initial burden which is required to be discharged as per section 271(1)(c) could not be considered to have been discharged on the ground that the entry exists in the books of account. It is putting the burden on the Revenue as has been done in this case by the Tribunal that the entry was existing in the books of account and it was for the Income-tax Officer to have examined the same. This could not be considered to be a proper interpretation of the explanation. The initial burden has not been discharged in this case. We may also observe that in the case of Badri Prasad Om Prakash v. Commissioner Of Income-Tax, [1987] 163 ITR 440, this court has upheld the levy of penalty under section 271(1)(c) where the speculative loss was added to the commercial profit and even a revised return was filed by the assessee. The act of filing the revised return was considered not to mitigate the offence which has already been committed. In these circumstances, we are of the view that the Tribunal was not justified in cancelling the penalty of Rs. 21,500 levied under section 271(1)(c).

8. Consequently, the reference is answered against the assessee and in favour of the Revenue. No order as to costs.

Commissioner Of Income-Tax v. Raj Trading Co.

Structured Summary of the Opinion (V.K. Singhal, J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Revenue's Arguments

Assessee's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income-Tax v. Raj Trading Co.

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