I. T. AS. NOS. 1186/KB AND 1187/KG OF 1981-82, DERIDED ON 8TH JULY, 1985. Versus I. T. AS. NOS. 1186/KB AND 1187/KG OF 1981-82, DERIDED ON 8TH JULY, 1985.
ORDER
The appellant, a Private Limited Company, has come up in further appeals against the orders of the learned C. I. T. (A) Zone‑3, K dated 8‑3‑1982 on the issue of levy of penalty under section 28 (1‑A) of the Repealed Income Tax Act, 1922 (hereinafter called the Act) for the charge years 1975‑76 and 1976‑77.
2. The appellant was engaged in bleaching, dyeing and manufacture of hosiery goods. For the charge year 1975‑76 return was filed showing loss of Rs. 3,03,929 on recorded sales at Rs. 21,65,460 yielding G. P. rate of 18.1 %. While examining the appellant's books of accounts, the I. T. O. noted the following discrepancies:‑
(i) In hosiery section purchases were unvouched and the same were recorded in lump sure in journal. In the break‑up furnished by the appellant purchases shown in the name of some parties could not be established due to lack of verification despite notice issued under section 37 of the Act.
(ii) Debit side of expenses was unverifiable and despite proper notice water expenses paid to Mr. R---------A------were not open to any verification.
The I. T. O. examined Mr. T. M. S.-----Managing Director of the appellant Company under section 37 of the Act, who stated that after checking of vouchers, files of' the Company in the custody of the Income-tax Officer, be could not locate the required purchase vouchers. On the basis of these defects, the I. T. O., concluded that:‑
"It appears to be a case where these expenses and purchases charged were not genuine and hence it is one of the various modes of suppression of income by inflating expenditure of the P and L account."
After rejection of the appellant's books of accounts, the I. T. O. applied G. P. rate of 35%. to sales estimated at Rs. 22,50,000 and an addition of Rs. 3,95,401 was made to the trading account. The appel lant's income was assessed at Rs. 4,63,096. In appeal the learned A. A. C. reduced the G. P. rate to 30% and raised the estimate of sales on proportionate basis from Rs. 22,50,000 to Its. 23,83,656. As per appellate order the appellant's income stood reduced to Rs. 3,84,693.
For the charge year 1976‑77 for similar defects as of the earlier year, the I. T. O. discarded the appellant's declared sales at Rs. 28,92,902 yielding G. P. rate of 18.3 %. Sales estimated at Rs. 30,00,000 were subject to G. P. rate of 35 %. An addition of Rs. 3,35,990 was made to the trading account. The appellant's income was determined at Rs.4,13,873 against returned loss of Rs. 2,46,242. In appeal applied G. P. rate was reduced to 30% and sales estimate was raised to Rs. 31,79,013. As per appellate order the appellant's income was reduced,
In further appeals riled by the appellant for both the years the Tribunal vide its decision in I.‑T. A. No. 993/994/KB of 197879 decided on 27‑3‑1979 maintained the orders of the first: appellate authority holding :‑
"For the other years we find the enhancement in sales in line with the past record and see no cause for interference. The harshness, if any, stands mitigated by .the relief granted by the Appellate Assistant Commissioner by curtailing the gross profit rate."
3. For both the years the I. T. O. issued notice under section 28 (3) of the Act to the appellant on the basis of defects in the books of accounts as mentioned in the assessment orders i.e. unverifiable sales of yarn, unvouched purchases of raw material, inflated debit side of expenses and non‑verification of expenses under the head water charges. The appellant replied to the I. T. O. that rejection of trading results and in consequence processing of assessments by estimate of sales and application of ap propriate G. P. rate did not amount to furnishing of inaccurate particulars of income as used in section 28 (1‑A) of the Act. The appel lant's reply did riot find favour with the I. T. O. who was of the view that inflation of expenses of debit side, unverifiability of purchases/sales fell within the ambit of furnishing of inaccurate particulars of income meriting levy of penalty, The I. T. O. levied penalty at Rs. 1,94,921 and Rs. 1,55,220. Both these penalties were maintained in appeal.
4. The learned counsel for the appellant contended that defects of unvouched purchases, unverifiability of sales and inflation of expense were relevant for rejection of books of accounts but could not be treated as a sound basis for attributing concealment of income and furnishing of inaccurate particulars of income under section 28 (1‑A) of the Act. The case of the appellant's learned Authorised Representative was that the Departmental Officers erred in levying penalty without independently establishing on the basis of any material that appellant had either concealed its income or furnished inaccurate particulars of income. In support of this plea the appellant's learned counsel relied on some case law, which will be discussed in later part of this order. The learned Departmental Representative reiterated the plea adopted by 1t!re Depart mental Officers that the defects in the books of accounts as mentioned in the assessment orders of the years under review were sufficient to hold that the appellant had concealed its income by furnishing inaccurate particulars. The case of the learned Departmental Representative was that the appellant having regularly adopted device of recording bogus purchases and sales and inflated debt side of expenses, the mode o maintenance of accounts adopted by the appellant tantamounted to concealment of actual income.
5. After hearing the representatives of the parties, we are of the considered view that in the facts and circumstances of this case the depart ment has failed to establish any element of concealment or furnishing of inaccurate particulars of income by the appellant. The Assessing Officer wrongly relied on certain instances of unvouched purchases and un verifiable sales. The appellant's books of accounts were in possession of the I. T. O. In response to notice under section 37 of the Act, verifica tion of certain purchases and sales could not be made. That in itself did not tantamount to concealment on the part of the appellant. Existence of element of unverifiability in purchases and sales was a good ground for rejection of the appellant's books of accounts. Similarly, finding of the Assessing Officer attributing inflation of expenses due to non‑availability of the persons who was allegedly paid water expenses could not be a good ground for attributing any element of concealment to the appellant. The reasons advanced by the I.‑T. O. for levying penalty under section 28 (I‑A) of the Act were strictly relevant for rejection of accounts only.
The defects pointed out by the I. T. O. in the assessment orders for these years were duly considered and adjudicated till further appeal stage. For the purposes of penalty proceedings we repels the plea of the learned Departmental Representative that some defects be deemed to be relevant. No person can be prosecuted for the same offence more than once. For the attributed defects in the books of accounts the appellant was duly penalised by rejection of accounts and application of G. P. rate to estimated sales.
Burden of proof for establishing concealment is always do the department and the defects pointed out by the I.‑T. O. in the assessment orders cannot be deemed to be conclusive or prima facie evidence for establishing guilt of concealment or suppression of income. If the basis adopted by the Departmental Officers in the instant case for levy of penalty under section 28 (1‑A) of the Act are approved, the resultant effect will be that in each and every case of rejection of accounts penalty for concealment will be automatically leviable. That is against the spirit of law and principles of justice as enunciated in various authorities.
6. In 1970 I T R 696 (S C) it was held:‑
"It is well‑settled that the penalty proceeding is penal in character and the onus is on the department to show that a particular receipt or amount is of revenue nature. In order to determine whether any particular receipt or amount represented income and whether the assessee had consciously concealed the particulars of his income or bad deliberately furnished inaccurate particulars thereof warranting the imposition or penalty, the entirety or totality of facts and circumstances but not each or some of the factors, should be taken into consideration. In other words, the income‑tax authorities must be satisfied, on examination of the cumulative effect or the entirety of circumstances, that the only reasonable inference from such factors or material that could be drawn was that the amount in question represented income and that the assessee had concealed particulars of his income or had deliberately furnished inaccurate particulars thereof. Where there is no positive evidence warranting the inference that the disputed amount was concealed income of the assessee or that he bad deliberately furnished inaccurate parti culars of his income, no penalty is exigible. Where the explanation offered by the assessee has been found to be false and there is no other material or evidence except the conduct of the assessee in giving false explanation regarding the source of the amount in dispute, no penalty can be levied as it cannot be said that the only inference that can be reasonably and safely drawn on such facts is that the receipt constituted the taxable income of the assessee. The findings arrived at by the income‑tax authorities in the assessment proceeding for the determination or computation of tax are not conclusive for the purposes of levying penalty although they may be good evidence. However, penalty cannot be levied solely on the basis of reasons or findings given in the assessment proceedings."
The same view was adopted in (1976) 102 I T R 834. In (1958) 34 I T R 98 it was held that the proceedings for the levy of penalty are always quasi‑criminal proceedings and the onus is on the department to establish necessary ingredients under section 28 (1). In (1970) 76 I T R 696 it was concluded that:‑
The first point which falls for determinations whether' the imposition of penalty is in the nature of a penal provision. The determination of the question of burden of proof will depend largely on the, penalty proceedings being penal in nature or being merely meant for imposition of an additional tax, the liability to pay such tax having been designated as penalty under section 28-----It is true that penalty proceedings under section 28 are included in the expression `assessment' and the true nature of penalty has been held to be additional tax. But one of the principal objects in enacting section 28 is to provide a deterrent against recurrence of default on the part of the assessee. The section is penal in the sense that its consequences are intended to be an effective deterrent, which will put a stop to practices, which the legislature considers to be against the public interest.
In these circumstances we hold that a penalty proceeding is different from an assessment proceeding and is not a mere formality. It starts after the assessment proceeding is over and for holding any assessee guilty of concealment or furnishing of inaccurate particulars of income, independent material is to be brought out in the penalty proceedings after affording reasonable opportunity of hearing to the assessee. It follows as a logical, corrollary, that the conclusion reached in the assessment proceedings for rejection of accounts could not by itself be enough to hold that the assessee concealed his income or deliberately furnished inaccurate particulars of such income under section 28 (1) (c).
6. As a result of the above discussion penalties imposed for both the years under review being inexigible are knocked off. Appeals filed at the instance of the assessee succeed accordingly.
M. Y. H. Appeals accepted.