Spectrum Construction Company v Assistant Commissioner of Income Tax

Income Tax Appellate Tribunal

AHMEDABAD ‘B’ BENCH

14 March 2000

IT Appeal No. 1856 (Ahd.) of 1994, [Assessment year 1982-83].

The Order of the Court was as follows :

Per Shri T. N. Chopra, A.M. – This appeal is filed by the assessee against the order of the CIT (A) dated 2-3-1994 whereby penalty of Rs. 1, 82, 648 levied under section 271(1)(c) for A.Y. 1982-83 has been confirmed.

The relevant facts may be briefly stated. The accounting year of the assessee for assessment year 1982-83 ended on 30-6-1981. The assessee filed the original return of income declaring loss of Rs. 2, 40, 112. Subsequently a revised return was filed declaring loss of Rs. 56, 727. The Assessing Officer made the assessment on total income of Rs. 6, 87, 916 vide order dated 30-3-1988 making inter alia additions of Rs. 1, 13, 592 on account of unexplained cash seized during the search operations from the business premises of the assessee and Rs. 1, 63, 140 added on account of unexplained transactions recorded in the loose papers seized during search operations.

In appeal the CIT (A) upheld both the additions aggregating to Rs. 2, 76, 732. In further appeal the Tribunal vide its order dated 28-9-1993 allowed the benefit of set off as requested by the assessee and upheld the addition to the extent of Rs. 1, 45, 640 allowing benefit of set of with regard to the balance addition of Rs. 1, 31, 092.

The Assessing Officer initiated penalty proceedings during the course of assessment proceedings and proceeded to levy penalty of Rs. 1, 82, 648 under section 271(1)(c) . In relation to the following two items (i) Rs. 1, 63, 140 on the basis of unexplained transactions in the loose papers and (ii) unexplained cash found during search Rs. 1, 13, 592. While levying the impugned penalty, the Assessing Officer invoked Explanation I to Section 271(1)(c) . The CIT (A) vide the impugned order dated 2-3-1994 upheld the levy of penalty however directed the Assessing Officer to recompute the penalty after giving effect to the order of the Tribunal in quantum appeal. The ld. counsel submitted the calculation before us and stated that the recomputed penalty under section 271(1)(c) would work out to Rs. 96, 122.Aggrieved by the order of the CIT (A) the assessee has come up in appeal before us.

A few facts with regard to the additions made on the basis of unexplained cash found during search operations as well as the notings made in the loose papers, which would have a bearing on the question of exigibility of concealment penalty, may now be indicated. The business premises of the assessee-firm were raided by the I.T. authorities on 12-8-1980 and cash amounting to Rs. 1, 13, 592 was found by search party at the premises. The authorised officers found that cash book of the assessee was written upto 7-8-1980 whereas the cash balance had been drawn up only upto 30-6-1980 (pertaining to assessment year 1981-82). The closing balance as on 30-6-1980 was recorded at Rs. 5, 053 only. The authorised officers noted that no cash withdrawals have been made from the cash books after 30-6-1980. Cash amount of Rs. 1, 10, 000 was seized by the authorised officers.

During the course of proceedings the assessee, when called upon to explain the source of the cash of Rs. 1, 13, 592, explained that :

“(i) Certain amounts received from the members were not taken into account while writing carried forward balance or cash.

(ii) The accountant had written the cash book only with reference to bank pay-in-slips, cheque books etc. pertaining to bank transactions.

(iii) Cash received was not deposited on the next day in the bank as per the usual practice.

(iv) M/s. Ghanshyam Const. Co. who was demanding payment by cash was requested by the assessee to accept the payment by cheque subsequently. It was stated that since M/s. Ghanshyam Const. Co. may ask for cash at a time, substantial cash was being kept.”

A similar explanation was repeated during the course of assessment proceedings before the Assessing Officer. The Assessing Officer considered the explanation with reference to the seized records and observed that the books of account seized during search effectively controverted the story made out by the assessee. Vide para 11 of the assessment order the Assessing Officer observed as under :

“Now as discussed above for the year ending 30-6-1980 upto which the assessee had prepared cash book, balance available with the assessee was Rs. 5, 053. The two rojmel for the subsequent period are seized by the department. Rojmel on S. No. 9 of the Panchnama suggests that the assessee has written this cash book upto 7-8-1980 in which the cash has not been carried forward from day to day. This rojmel starts from 1-7-1980 and it shows that whatever payments were received by cash were being deposited in the bank account. The assessee has shown the payments of cash only for very very petty expenses. Thus, it is not established by the assessee that the cash which was found during the course of search was explained by the books of account maintained by him. There is also another book which maintains details regarding the payment received by cheque. This is as per S. No. 8 of the Panchnama. This book starts from 1-7-1980 and is written upto 5-8-1980. On 15-7-1980 vide this book page No. 9 the assessee made payment of Rs. 502 and Rs. 300 by cheque for the expenditure incurred on petty accounts. If the assessee had available cash as he wants to explain, he would not have made these payments by cheque. There is yet another register which is described as cash register. Its number is 106 as per Panchnama and as per this register also, the assessee was remaining aware of the cash position from day to day. This cash register is maintained from 14-5-1980 and the transactions are written upto 11-8-1980. As per this book also, whatever cash was being received was deposited in the bank on the very next day. Thus, even as per this cash register, the huge cash found during the course of search is not explainable.”

The Assessing Officer thus made an addition of Rs. 1, 13, 592 treating the cash as unexplained.With regard to the second addition of Rs. 1, 63, 140 made on the basis of loose papers, search party seized loose sheets S. No. 1 to 8, at page No. 2 payments made Rs. 10, 000 to the pleader and Rs. 7, 500 to other persons have been indicated. Page No. 6 shows the following receipts :

“Page No. 6 shows the following receipts. :

Rs. 2, 595 Narsibhai Lallubhai Rs. 6, 670 For interest income Rs. 10, 000 For Sarvodaya ————– Rs. 1, 09, 265”

————–

Similarly at page 7 shows the following receipts :

Rs. 1, 000 Talpad Rs. 825 Nilkanth R. Thakkar Rs. 3, 500 S. N. Talati Rs. 28, 050 Proposed draft Rs. 500 Gram Panchayat Talati ————– Rs. 36, 375 ————–

When confronted with the aforesaid documents seized from its business premises, no Explanation has been given before the tax authorities below. Statement of Shri Amratlal, partner was recorded by the Assessing Officer on 29-10-1980 and he stated that he could not explain the transaction and he was not aware of them. According to Shri Amratlal the loose papers belonged to some staff members and not to be assessee-firm. The Assessing Officer however rejected the Explanation and treated the aggregate amount as recorded in these papers in the sum of Rs. 1, 63, 140 as concealed income of the assessee.

The dispute involving the aforesaid two additions, Rs. 1, 13, 592 in respect of cash seized and Rs. 1, 63, 140 made on the basis of loose papers travelled upto the Tribunal at the instance of the assessee. Before the Tribunal the ld. counsel for the assessee, after arguing the matter at the first instance, conceded the addition on the basis of loose papers and requested for set off of the addition on account of cash seized against addition on the basis of seized papers. The issue has been dealt with vide para 6 of the Tribunal’s order dated 28-9-1993 in ITAT No. 6100/Ahd./89 wherein it has been observed :

“The ld. counsel thereafter submitted that he would not like to press this point and he will be satisfied if the alternative submission made in ground No. 14 is favourably considered. In ground No. 14 it has been submitted that the addition made on the basis of loose papers found and seized during the course of search according to the department includes items of unaccounted receipts of the sums of Rs. 1, 09, 265 and Rs. 36, 375. The fact that it has been treated as receipt by the department is verifiable from the order under section 132(5) passed by the ITO. If these amounts are regarded as receipts, the corresponding payments as per loose papers of Rs. 17, 500 and the cash found during the course of search of Rs. 1, 13, 592 will be adequately explained out of the so called unexplained receipts determined on the basis of seized papers.”

Accepting the argument of the ld. counsel the Tribunal held vide para 8 of its order as under :

“It is thus clear that according to the department the various loose papers show that the assessee received unaccounted amount aggregating to Rs. 1, 45, 640 (Rs. 1, 09, 265 – plus Rs. 36, 375) out of which payments aggregating to Rs. 17, 502 were made. This leaves a balance amount of Rs. 1, 28, 138 which adequately covers the unaccounted cash of Rs. 1, 13, 592 found and seized during the course of search. We, therefore, consider it just and proper to direct that addition of Rs. 1, 45, 640 should be sustained and separate addition made in respect of cash found during the course of search amounting to Rs. 1, 13, 592 and addition made on the basis of loose sheet papers containing entries of payments to the extent of Rs. 17, 502 should be deleted. In other words, the aggregate addition of Rs. 1, 45, 640 is sustained out of the two separate additions of Rs. 1, 13, 592 and Rs. 1, 63, 140 made by the ITO and confirmed by the CIT (A).”

The ld. counsel, assailing the impugned penalty upheld by the ld. CIT (A), argued that penalty for concealment cannot be levied merely on the basis of the additions confirmed for assessment purposes. According to the ld. counsel the department has failed to adduce positive evidence on record in support of the charge of concealment. The ld. counsel further added that the ld. CIT (A) has misdirected himself in law and on facts in relying on section 132(4A) of the Income-tax Act for holding that amounts written in loose papers represent income of the assessee for purposes of levy of penalty under section 271(1)(c) . According to the ld. counsel no such presumption would apply for the purposes of imposing penalty under section 271(1)(c) .

Per contra ld. DR supporting the order of the CIT (A) argued that seized papers have been found from the business premises of the assessee and the onus lies upon the assessee to disprove ownership of these documents. The ld. D.R. referred to the provisions of section 132(4A) of Income-tax Act, 1961 as well as section 110 of the Indian Evidence Act in support of this arguments. The ld. D.R. urged that since the Assessing Officer has invoked Explanation I to section 271(1)(c) , the entire issue of levy of penalty has to be considered on the touch stone of the conditions laid down under the Explanation I to section 271(1)(c) . Referring to the fact that the assessee had conceded the addition made on the basis of loose papers before the Tribunal and was allowed the benefit of set off of the second addition on account of unexplained cash of Rs. 1, 13, 562. The ld. D.R. emphasised that penalty for concealment under section 271(1)(c) is clearly attracted on the basis of these facts.

We have given our thoughtful consideration to the rival submissions and carefully gone through the facts and material on record. We feel that there is ample evidence on record in support of the conclusion that the receipts of money recorded in the loose papers seized from the possession of the assessee and reflected in the unexplained cash seized from the premises represent the concealed income of the assessee. In fact the assessee had itself conceded the addition made on the basis of loose papers and sought telescoping the said addition against the addition on account of the seized cash. Thus the notings recorded on the loose papers are amply supported and reflected in the seized cash and benefit of set off as sought by the assessee has been allowed by the Tribunal, as indicated hereinbefore. Once the assessee has sought benefit of set off of the addition on account of seized cash against the receipts reflected in the loose papers, the assessee cannot turn back and say that the loose papers seized from its possession during search operations do not belong to it. At this stage it would be relevant to mention that Explanation II appended to section 271(1)(c) , introduced by the Taxation Laws (Amendment) Act 1974 provides for initiation and levy of penalty in situations where any receipt or deposit etc. is claimed by any person as attributable to the additions made in the earlier assessment year or years. In such situation Explanation II provides that even if no penalty had been levied in the earlier assessment year, such amount for which set off had been claimed by the assessee would be treated as concealed income and penalty for concealment would be levied. In the instant case when the assessee claims that the seized cash is attributable to the unaccounted receipts as reflected in the loose papers seized from the possession of the assessee, a legitimate inference of concealment would naturally follow and penalty under section 271(1)(c) would be exigible.With regard to the contention of the ld. counsel that section 132(4A) would not be applicable, we are not persuaded to accept this argument. Section 132(4A) raises certain presumptions and enacts that where any books of account, other documents, money or other valuable articles or thing are found in the possession or control of any person in the course of search it may be presumed that (i) such books of account, documents, money etc. belong to such person, (ii) the contents of such books and documents are true and (iii) such books and documents are in the handwriting of that person. This section incorporates into the Income-tax Act a well accepted rule of evidence which embodies a salutary principle of common law jurisprudence. A similar principle is enacted in section 110 of the Indian Evidence Act which provides that

“when the question is whether any person is owner of anything of which he is shown to be in possession, the burden of proving that he is not the owner is on the person who affirms that he is not the owner”

. The presumption raised under section 132(4A) of the Income-tax Act or section 110 of the Evidence Act is a rebuttable presumption which has the effect of shifting the burden of proof. Even if such presumption is made, the same is rebuttable and the person is free to lead evidence to rebut such presumption. In the instant case we find that the assessee has failed to rebut or refute the presumption by leading any evidence whatsoever. On the contrary the assessee has requested for set off of the addition on account of seized cash against the addition based on loose papers. Rather than rebutting the presumption of ownership, the assessee has pleaded benefit of set off and the same has been allowed to the assessee. In this view of the matter we are of the considered opinion that the provisions of section 132(4A) of Income-tax Act are applicable and the presumption of ownership has not been rebutted by the assessee. Therefore the seized papers belong to the assessee and the addition on the basis of unaccounted receipts reflected therein represents the concealed income of the assessee and penalty under section 271(1)(c) is therefore clearly leviable.In support of our view, reliance is placed on the landmark judgment of the Supreme Court in Chuharmal v. CIT 1988 Indlaw SC 360 at page 255 1988 Indlaw SC 360.) of the reports their Lordships observed :

“In this connection reference may be made to the views expressed by Justice Tulzapurkar, as his Lordship then was, of the Bombay High Court in the case of J. S. Parkar v. V. B. Palekar 1973 Indlaw MUM 2970, where, on a difference of opinion between Justice Deshpande and Justice Mukhi, Justice Tulzapurkar agreed with Justice Deshpande and held on the question whether the evidence established that the petitioner was the owner of the gold seized, though there was no direct evidence placed before the taxing authorities to prove that the petitioner had actually invested moneys for purchasing the gold in question, the inference of the ownership of the gold in the petitioner in that case rested upon circumstantial evidence. There also gold was seized from a motor launch belonging to the petitioner in that case. There, a contention was raised that the provision in section 110 of the Evidence Act where a person was found in possession of anything, the onus of proving that he was not the owner was on the person who affirmed that he was not the owner, was incorrect and inapplicable to taxation proceedings. This contention was rejected. The High Court of Bombay held that what was meant by saying that the Evidence Act did not apply to proceedings under the Act was that the rigour of the rules of evidence contained in the Evidence Act was not applicable but that did not mean that when the taxing authorities were desirous of invoking the principles of the Act in proceedings before them, they were prevented from doing so. Secondly, all that section 110 of the Evidence Act does is that it embodies a salutary principle of common law jurisprudence which would be attracted to a set of circumstances that satisfy its conditions.We are of the opinion that this is the correct approach and following this principle, the High Court in the instant case was right in holding that the value of the wrist-watches represented the concealed income of the assessee.”

An important plank adopted by the ld. counsel in assailing the impugned penalty before us is that the levy of penalty under section 271(1)(c) on the basis of facts and evidence brought or record during the assessment proceedings would not be justified since the basic parameters for making the addition are entirely different from the parameters required for levy of concealment penalty. Viewed in the backdrop of facts and evidence adduced by the revenue we feel that the pre-requisite conditions for levy of penalty under section 271(1)(c) are satisfied in the instant case and therefore penalty is liable to be upheld. The seized papers reflecting unaccounted receipts supported and corroborated by seizure of unexplained cash and failure of the assessee to rebut the presumption raised under section 132(4A) of the Income-tax Act as well as section 110 of the Indian Evidence Act provide adequate justification for invoking the penal provisions contained under section 271(1)(c) . While considering the exigibility of penalty under section 271(1)(c) , the Assessing Officer is unquestionably entitled to consider the facts and material brought on record during assessment proceedings and if such material in the opinion of the Assessing Officer justify the imposition of penalty, the penalty would clearly be leviable. This is particularly so in the case in hand where the assessee did not make even a faint attempt during penalty proceedings to controvert or refute the material on record.

Apart from the levy of penalty under the main provisions contained in section 271(1)(c) , it is relevant to note that the Assessing Officer has invoked Explanation I to section 271(1)(c) and held that with regard to seized cash, the explanation furnished by the assessee has not been substantiated and clause (B) of Explanation (1) would be applicable in so far as addition on account of unexplained cash is concerned. With regard to addition on the basis of notings in the loose papers the Assessing Officer has observed that no explanation has been offered by the assessee and clause (A) to Explanation (1) is applicable.We may now consider the issue of levy of penalty by the Assessing Officer by applying the Explanation (1). Explanation (1) has been appended to clause (c) of section 271(1) by theTaxation Laws (Amendment) Act, 1975 w.e.f. 1-4-1976 by way of substitution of the original Explanation which was earlier inserted by the Finance Act, 1964w.e.f. 1-4-1964 Explanation (1) incorporates a rule of evidence and shifts the onus on the shoulders of the assessee in furnishing the explanation before the Assessing Officer. The explanation lays down a rule of evidence. Applying Explanation (1) to the facts of the instant case, the Explanation of the assessee is to be examined by applying the test of preponderance of probabilities for arriving at a conclusion whether the deeming fiction as contained in Explanation (1) applies. In the instant case before us in so far as addition of Rs. 1, 63, 140 is concerned, subsequently reduced by the Tribunal to Rs. 1, 45, 640, no explanation whatsoever has been furnished by the assessee to explain the entries recorded in the loose papers. Shri Amritlal Patel, partner of the assessee-firm, merely denied ownership of the seized papers and claimed that the papers belonged to some staff members. In the circumstances the presumption under Explanation (1) has neither been rebutted nor dislodged by the assessee. As we have already indicated earlier the assessee has sought the benefit of set off against the addition made on the basis of loose papers. Similarly with regard to seized cash, even though the addition of Rs. 1, 13, 592 has been set off against the first addition made on the basis of loose papers yet the fact remains that the assessee has not been able to substantiate its explanation that the amount seized by the search party has been received from members and not accounted for in the books. This unsubstantiated explanation of the assessee has been controverted and refuted by the Assessing Officer on the basis of the seized books appearing at Srl. No. 8, 9 and 106 of the Panchnama, as discussed by the Assessing Officer in the assessment order and the relevant observations extracted hereinbefore. At Srl. No. 9 of the panchnama appears a rojmel (journal) which shows that the assessee has written the book from 1-7-1980 to 7-8-1980 and it shows whatever amounts were received by cash were deposited in the bank account. The claim of the assessee regarding receipts of money from members is falsified by the entries in this journal book. Further there is a journal appearing at Srl. No. 8 of the Panchnama which starts from 1-7-1980 and is written upto 5-8-1980. This journal shows payments made by cheque for petty amounts which clearly indicates that the cash in hand as per accounted version is a meagre amount. The Assessing Officer has further referred to the register appearing at Srl. No. 106 of the Panchnama maintained from 14-5-1980 to 11-8-1980 as per this register also whatever cash was being received was being deposited in the bank on the very next day. Thus none of the aforesaid journals and registers seized during search operations from the business premises of the assessee reflect the cash of Rs. 1, 13, 592 found during search operations. Thus the revenue has effectively established that the explanation furnished by the assessee for explaining the cash found is not correct. In the light of these facts we hold that the assessee has failed to rebut the presumption enacted under Explanation (1) on the test of preponderance of probabilities. Therefore in our opinion Explanation (1) is clearly applicable and penalty under section 271(1)(c) is therefore leviable.In support of the view being taken by us above reliance is placed on the decision of the Supreme Court in CIT v. Jeevan Lal Sah 1993 Indlaw SC 628 in which it has been held that rule regarding burden of proof enunciated in CIT v. Anwar Ali 1970 Indlaw SC 492 (SC) was no longer valid and the cases to which the Explanation was attracted have to be decided in the light of the law enunciated in the case of CIT v. Mussadilal Ram Bharose 1987 Indlaw SC 281231987 Indlaw SC 179H.) (SC) and CIT v. K. R. Sadayappan 1990 Indlaw SC 4781990 Indlaw SC 478.) (SC).

Having regard to the aforesaid discussion we hold that penalty under section 271(1)(c) is leviable in the instant case under the main provision as also by applying Explanation I to section 271(1)(c) . However with regard to the quantum of penalty we are inclined to accept the submission of the ld. counsel that penalty is to be quantified afresh on the basis of the order of the Tribunal in quantum appeal dated 28-9-1993.

In the result, the appeal is penalty allowed as above.