2006 (8) TMI 156 - HC - Income Tax

Penalty levied u/s 271(1)(c) - Books of account rejected from year to year - Substantial additions accepted by assessee - The assessee persisted in maintaining the books of account in the same way - HELD THAT - We have gone through the order passed by the Tribunal. With due respect to the Tribunal, we must say that it has ignored the mandatory direction issued by this court. Not only this, it has conveniently ignored the observations made by this court by not taking into consideration the findings recorded by the Inspecting Assistant Commissioner and the reasons which persuaded him to culminate the proceedings against the interests of the assessee, the Tribunal also did not consider the effect of and the fact that the assessee was persisting in maintaining the books of account in the same manner which were, for the earlier assessment years, found unreliable. Unfortunately, the Tribunal, for the reasons best known to it, has observed the order passed by this court in its complete breach. The Tribunal, on one side, was referring to the observations of the court to the effect that the assessee had failed to discharge the burden which lay on it under the Explanation but on the other hand the Tribunal held that the burden was upon the Revenue to prove that the assessee was guilty of fraud or gross or wilful neglect. This approach of the Tribunal is patently perverse. On neglect, the Tribunal observed that there was no gross or wilful neglect on the part of the assessee. This again was illegal. The Tribunal was also unjustified in holding that the matter could be decided on the strength of the material available in the form of diaries. If the income had to be assessed under section 145(1), then the presumption would be that the income was not properly returned and if the very same conduct is repeated for the following years, then there is no escape from the clutches of the words gross/wilful neglect on the part of the assessee. Even otherwise, the Tribunal was unjustified in holding that the imposition of the penalty may not be possible for a particular assessment year in view of the persistent neglect for past years. Taking into consideration the totality of the circumstances, the observations made by this court, in the earlier proceedings between the same parties for the same years, we are of the opinion that the Tribunal was unjustified in interfering in the matter. The reference is answered in favour of the Revenue. The order passed by the Tribunal is quashed.

Summary

Issues:
1. Interpretation of penalty under section 271(1)(c) of the Income-tax Act.
2. Justification for cancellation of penalty by the Appellate Tribunal.
3. Burden of proof on the assessee in penalty proceedings.
4. Consideration of past conduct of the assessee in penalty imposition.
5. Compliance with court directions and legal provisions in penalty proceedings.

Issue 1: Interpretation of penalty under section 271(1)(c) of the Income-tax Act:
The case involved a reference under section 256(1) of the Income-tax Act regarding the cancellation of penalty under section 271(1)(c). The Assessing Officer applied section 145(1) and added 20% to the returned income due to improper maintenance of accounts. The penalty was imposed by the Inspecting Assistant Commissioner, leading to a series of legal proceedings.

Issue 2: Justification for cancellation of penalty by the Appellate Tribunal:
The Appellate Tribunal initially canceled the penalty citing the assessee's bona fide conduct. However, the High Court found the Tribunal's decision erroneous, emphasizing that the burden was on the assessee to prove good faith and absence of fraud. The Tribunal's subsequent decision to again cancel the penalty was challenged by the Revenue, leading to a detailed analysis by the High Court.

Issue 3: Burden of proof on the assessee in penalty proceedings:
The High Court clarified that if the assessee fails to prove the action was bona fide, the Explanation under section 271(1)(c) would not protect them. The Tribunal's failure to consider the past conduct of the assessee in maintaining unreliable accounts and the repeated additions to income each year was highlighted as a crucial oversight.

Issue 4: Consideration of past conduct of the assessee in penalty imposition:
The High Court emphasized the significance of the assessee's persistent default in maintaining accounts over multiple years. The Tribunal's disregard for the repeated nature of the discrepancies and the reliance on audit reports without proper verification were considered detrimental to the assessee's case.

Issue 5: Compliance with court directions and legal provisions in penalty proceedings:
The High Court criticized the Tribunal for ignoring previous court directions and failing to consider the findings of the Inspecting Assistant Commissioner. The Tribunal's deviation from legal provisions and its misinterpretation of the burden of proof in penalty proceedings were deemed unjustified.

In conclusion, the High Court ruled in favor of the Revenue, quashing the Tribunal's order and emphasizing the importance of adhering to legal provisions and considering the assessee's past conduct in penalty imposition.