Hindustan Asbestos Cement Product v Commissioner of Income Tax

Rajasthan High Court

22 January 1987

ITR No. 10 of 1978

The Judgment was delivered by I. S. ISRANI J.

ISRANI J.

This is an income-tax reference under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), by which certain questions of law have been referred to this court Briefly stated, the assessee is an unregistered firm. In the previous year relevant to the assessment year 1970-71, the assessee derived income from the manufacture and sale of cement pipes and other cement products. In the year of account, the assessee had shown a gross profit of Rs. 69, 434 by applying gross profit rate of 30% on its total sales shown at Rs. 2, 31, 448. After adjusting the profit and depreciation, the assessee showed its annual income. The Commercial Taxes Department of Rajasthan had seized the books of the assessee for the period January to June, 1969. The seized records included a rough cash book and the regular cash book of the assessee-firm. The assessee had taken inspection of his books of account from the Department and it prepared certain registers on the basis of the vouchers for the subsequent period of the relevant assessment year. The Income-tax Officer, during the course of assessment proceedings, found that sales to the extent of Rs. 37, 976 which were recorded in the rough cash book of the assessee did not find a place in the regular cash book for the period up to May/June, 1969.

Therefore, he came to the conclusion that the assessee had suppressed these sales in respect of the amount mentioned above. He was also of the view that the assessee had not recorded full sales in his register for the subsequent period also of the relevant assessment year. Therefore, the Income-tax Officer estimated the sales of the assessee at Rs. 3, 50, 000. The gross profit was estimated by applying a rate of 50% to the estimated sale. Thus, the Income-tax Officer made an addition of Rs. 1, 05, 566 to the gross profit shown by the assessee. Learned Appellate Assistant Commissioner, in appeal, on estimated sales of Rs. 3, 10, 000 applied a gross profit rate of 40%. Thus, a relief of Rs. 51, 000, was given. On second appeal, the Tribunal applied a gross profit rate of 36% to the estimated sales of Rs. 3, 00, 000. Thus, the Tribunal sustained an addition of Rs. 38, 566 to the gross profit of the assesseeThe Income-tax Officer, at the time of completing the assessment, was of the view that there was concealment of income by the assessee. He was also of the view that the minimum penalty imposable exceeded Rs. 25, 000, and, therefore, he referred the matter to the concerned Inspecting Assistant Commissioner. Before the learned Inspecting Assistant Commissioner, in penalty proceedings, it was submitted on behalf of the assessee that the books of account of the assessee for the first six months’ period out of the accounting period were impounded by the commercial taxes authority and as such the assessee was unable to complete the books of account which resulted in variation in the sales as shown by the assessee and ultimately determined by the taxing authority. It was submitted that there was no deliberate furnishing of inaccurate particulars. It was also pointed out that there was no mens rea on the part of the assessee in not furnishing accurate particulars. Learned Inspecting Assistant Commissioner was of the view that the assessee had failed to explain that there was any fraud or gross or wilful neglect on the part of the assessee in not returning the assessed income and imposed a penalty of Rs. 52, 000

Before the Tribunal, it was submitted by the assessee that penalty proceedings were initiated by the Income-tax Officer on March 26, 1972. According to section 274(2) of the Act as it stood amended with effect from April 1, 1971, the Income-tax Officer was required to refer the penalty proceedings to the Inspecting Assistant Commissioner only if he was satisfied that the amount of income in respect of which the particulars had been concealed or inaccurate particulars had been furnished, exceeded the sum of Rs. 25, 000. Therefore, according to learned counsel, it was the duty of the Income-tax Officer to have quantified the income in respect of which he was satisfied that the assessee had concealed the particulars of the same. The Income-tax Officer had only said that the minimum penalty leviable exceeded a sum of Rs. 25, 000. It was further stated that from the penalty order of the Inspecting Assistant Commissioner, it would appear that even the Inspecting Assistant Commissioner did not work out the quantum of income allegedly concealed by the assessee. It was, therefore, contended that the reference of the penalty proceedings by the Income-tax Officer to the Inspecting Assistant Commissioner was illegal. The representative of the Department submitted that the total income returned by the assessee was admittedly less than 80% of the total income as assessed by the Income-tax Officer and the Explanation to section 271(1)(c) of the Act applies to the case of the assessee. It was submitted that unless the Income-tax Officer indicated to the contrary in the order initiating the action, it shall be deemed that the Income-tax Officer was prima facie satisfied that the entire difference in the income assessed and the income returned by the assessee to be the concealed income of the assessee and it was not obligatory on the part of the Income-tax Officer to quantity in the order initiating penalty action the amount of income which he felt the assessee had concealed. It was submitted that it was enough for the Income-tax Officer to state that the penalty imposable exceeded Rs.25, 000 and it was not necessary for the Income-tax Officer to specifically state the amount of income considered as concealedLearned Tribunal after hearing both the parties did not agree with the contention of learned counsel for the assessee. It was held that there was no statutory requirement on the part of the Income-tax Officer to quantify in the order initiating penalty proceedings as to the amount of income which prima facie was taken to have been concealed by the assessee. It was further held that the initiation of penalty proceedings under section 271(1)(c) shall be valid if from a reading of the assessment order of the Income-tax Officer, it can be reasonably inferred as to the extent of concealment, of which the Income-tax Officer’s satisfaction can be gathered, to have been right. It was also contended before the learned Tribunal that the Inspecting Assistant Commissioner had no jurisdiction to decide the penalty matter for the year under assessment on the grounds discussed above. Learned Tribunal, therefore, has referred the following questions for the opinion of this court

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that there is no statutory requirement on the part of the Income-tax Officer to specifically state in the order initiating penalty action as to the amount of income about which the Income-tax Officer is prima facie Satisfied as representing concealed income of the assessee ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that from a reading of the assessment order, it could reasonably be inferred that the Income-tax Officer’s prima facie satisfaction was reached with regard to the entire difference of assessed income and returned income and the penalty action was Started by him with regard to this amount of income ?

3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that even otherwise a reading of the assessment order of the Income-tax Officer shows that the Income-tax Officer was of the view that the assessee had suppressed sales to which extent he had made an increase in the sales shown by the assessee?

4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the learned Inspecting Assistant Commissioner had jurisdiction to decide the penalty matter for the assessment year under consideration?”

Mr. Ranka, learned counsel for the assessee, contends that under the provisions of section 271 of the Act, the Income-tax Officer has in the first instance to satisfy himself that the assessee has concealed the particulars of his income or furnished inaccurate particulars of such income., Then he has to determine the exact amount of income in respect of which the particulars have been concealed or inaccurate particulars have been furnished. If the Income-tax Officer finds that such amount exceeds sum of Rs. 25, 000, he shall not issue any direction for payment by way of penalty, but refer the same to the Inspecting Assistant Commissioner. He, therefore, contends that since the Income-tax Officer has not quantified the exact amount, but has merely written that as the minimum penalty imposable exceeds Rs. 25, 000, the penalty proceedings are being referred to the Inspecting Assistant Commissioner. According to learned counsel, this is illegal and shows that the Income-tax Officer has not applied his mind and there has been no satisfaction of the Income-tax Officer as required under the provisions of section 271 of the Act. He has drawn our attention to the case of CIT v. C. K. Naha & Bros. 1976 Indlaw CAL 140 (Cal), in which it was held by the Calcutta High Court that the Income-tax Officer must be satisfied in the course of assessment proceedings that the assessee has concealed the particulars of his income and the penalty imposable on the concealed income, in his opinion, exceeds Rs. 1, 000 (as it then was) and he must refer the penalty proceedings to the Inspecting Assistant Commissioner. In this case, the penalty proceedings were initiated by the Income-tax Officer with regard to a sum of Rs. 10, 263 and referred to the Inspecting Assistant Commissioner. The Inspecting Assistant Commissioner imposed penalty on a different sum of Rs. 19, 647 by making out a new case of concealment of that sum and it was found by the Tribunal that the sum of Rs. 10, 263 was also not included in the amount of Rs. 19, 647. It was, therefore, held that the penalty order passed by the inspecting Assistant Commissioner was null and void. Evidently, this ruling is not applicable to the facts of the case under consideration, as the Inspecting Assistant Commissioner has not done anything like this. In the case of Niemla Textile Finishing Mills Pvt. Ltd. v. CIT 1974 Indlaw PNH 19 (P & H), it was held that section 274(2) of the Act provides that only where minimum penalty imposable exceeds a sum of Rs. 1, 000 (as it then was), the Income-tax Officer shall refer the case to the Inspecting Assistant Commissioner who shall, for the purpose, have all the powers conferred under that Chapter for the imposition of penalty. It does not clothe him with the power to assess which is a prerequisite so far as section 271(1)(c) of the Act is concerned. Reading section 274 as a whole, the powers conferred by it upon the Inspecting Assistant Commissioner are in the matter of imposition of penalty and not for purposes of assessment. In this case, the Income-tax Officer had found that the assessee had concealed the income of more than Rs. 1, 000 and referred the matter to the Inspecting Assistant Commissioner, who found that the escapement was with regard to Rs. 69, 228 in addition to Rs. 8, 000 and levied penalty on the total. On appeal, the Tribunal found that no penalty was leviable in respect of Rs. 8, 000 and reduced the amount of undisclosed income to Rs. 35, 419 plus Rs. 6, 800. It was held that no penalty was exigible in the circumstances of the case, because the amount of Rs. 8, 000 which was held to be exigible for penalty was found by the Tribunal not to be so exigible. Therefore, the Tribunal was not right in directing that the penalty should be recomputed with respect to the addition of Rs. 35, 419 and Rs. 6, 800It is clear from the facts of this case also that the above authority has no applicability to the facts of the present case

In the case of B. Muniappa Gounder v. CIT 1975 Indlaw MAD 61 (Mad), the matter related to the cost of construction of certain houses by the assessee. The Madras High Court held that so long as the cost of construction was not properly determined in the penalty proceedings when it was put in issue by the assessee, the conclusion that the assessee had concealed the particulars of his income cannot follow as, before the charge of concealment could be sustained, one must know the amount which was complained of as concealed. As there was no finding on this aspect, the High Court returned the reference unanswered with a direction to the Tribunal to go into the question of cost of construction de novo and consider the levy of penalty in the light of the conclusion arrived at as regards the cost of construction. On the basis of this authority, learned counsel has argued that in the present case also, the Income-tax Officer had only mentioned that the penalty amount shall exceed Rs. 25, 000, but has not quantified the exact amount in this respect. He, therefore, contends that this is very vague and shows that the Income-tax Officer did not apply his mind as required by the relevant provisions of the Act. In the case of CIT v. Nav Bharat Automobiles 1973 Indlaw ALL 46, it was held by the Allahabad High Court that the burden of proving that there was no concealment of income is shifted to the assessee by the Explanation to section 271(1)(c). However, the Explanation can be relied on only if it is shown that the income returned by the assessee is less than 80% of the assessed income. In order to find out whether the income returned is less than 80% of the assessed income, any expenditure incurred bona fide for making or earning income and which has been included in the total income will have to be deducted. This authority is of no help to the assessee as evidently in the present case, the income shown by the assessee was nil in his returns and was evidently less than 80% of the assessed income. In the matter of Addl. CIT v. Gem Palace 1974 Indlaw RAJ 7 (Raj), it was held that as the assessee has agreed to enhancement in gross profit, the learned Tribunal held that the Explanation to section 271(1)(c) was not applicable to the facts of the case and did not involve any question of law. In the case of CIT v. Khoday Eswarsa & Sons 1971 Indlaw SC 254, their Lordships of the Supreme Court held that when there was no deliberate attempt at concealment, though there were doubtful circumstances, the conclusions drawn by the Appellate Tribunal were all on the findings of fact recorded against the Department and On those findings, no question of law arose for reference. Learned counsel for the assessee has, therefore, urged that the Inspecting Assistant Commissioner could not invoke the powers of the Explanation under section 271(1)(c) of the ActMr. Surolia, learned counsel for the Revenue, on the other hand, has contended that the very fact that the Income-tax Officer came to the conclusion that the amount exceeded Rs. 25, 000 and referred the matter to the Inspecting Assistant Commissioner, clearly shows the applicability of mind without which he could not have reached this conclusion. Therefore, it was not necessary for him to have further quantified the amount before referring the matter to the Inspecting Assistant Commissioner. It is enough that the amount of concealment is more than Rs. 25, 000 and, therefore, it was necessary for him to have referred the matter to the Inspecting Assistant Commissioner. He has also contended that it was for the Inspecting Assistant Commissioner to determine the exact amount and while doing so he could legally use the powers given under the Explanation to section 271(1)(c) of the Act. He has referred to the case of CIT v. Drapco Electric Corporation 1977 Indlaw GUJ 28, wherein it was held by the Gujarat High Court that in penalty proceedings initiated by the Incometax Officer without resorting to the Explanation to section 27l(1)(c), the Explanation can be relied upon by the. Inspecting Assistant Commissioner as it enacts merely a rule of evidence and it is competent for the authority which imposes penalty to invoke its aid and, in reaching the final conclusion on the question of concealment, although the Income-tax Officer may not have resorted to it at the stage when he made the reference to the authority

Similar view has been taken in the case of Kantilal Manilal v. CIT 1980 Indlaw GUJ 98 (Guj). In the case of Sri Ram Ram Narain Medhi v. State of Bombay,1958 Indlaw SC 88, their Lordships of the Supreme Court held as under

“If the language of the enactment is clear and unambiguous it would not be legitimate for the courts to add any words thereto and evolve therefrom some sense which may be said to carry out the supposed intention of the Legislature. The intention of the Legislature is to be gathered only from the words used by it and no such liberties can be taken by the courts for effectuating a supposed intention of the LegislatureTherefore, the statute has to be interpreted in the way it is framed as that indicates the intention of the Legislature when the Act was enacted. Under section 271, the Income-tax Officer is not required to quantify the exact amount, but he has only to come to the conclusion that it exceeds the amount of Rs. 25, 000. Under the provisions of section 274(2) as it stood before the Taxation Laws (Amendment) Act, 1973, sub-clause (2) of section 274 of the Act read as under”

(2) Notwithstanding anything contained in clause (iii) of sub-section (1) of section 271, if in a case falling under clause (c) of that subsection, the amount of income (as determined by the Income-tax Officer on assessment) in respect of which the particulars have been concealed or inaccurate particulars have been furnished exceeds a sum of twenty-five thousand rupees, the Income-tax Officer shall refer the case to the Inspecting Assistant Commissioner who shall, for the purpose, have all the powers conferred under this Chapter for the imposition of penalty

Therefore, it is clear from the wording of the provision itself that what the Income-tax Officer was required to do was to apply his mind and come to the conclusion whether the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished, exceeded the sum of Rs. 25, 000 and if he comes to the conclusion that it did exceed this amount, then he had to refer the case to the Inspecting Assistant Commissioner. The Income-tax Officer, therefore, was not required to quantify the exact amount and thereafter refer the same to the Inspecting Assistant Commissioner as contended by learned counsel for the petitioner. In this case, during the penalty proceedings, the assessee did not allege that the Income-tax Officer had wrongly come to the conclusion that the amount of income in respect of which particulars have been concealed or inaccurate particulars have been given did not exceed Rs. 25, 000 and did not give any details of any expenditure to show and claim any deduction. While the assessee filed returns, a letter was given that the books of the assessee were seized, which, in fact, he could have inspected with permission and even obtained copiesIn view of the above discussion, our answer to the questions referred for the opinion of this court is in favour of the Revenue and against the assessee